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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

|     |  |                                                                                         
|---- |  | ----------------------------------------------------------------------------------------
|[X]  |  | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934    
|     |  | For the fiscal year ended May 31, 2002or                                                
|     |  |                                                                                         
|[  ] |  | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|     |  | For the transition period from      to                                                  
|     |  |                                                                                         
|     |  | Commission file number 1-9927                                                           

COMPREHENSIVE CARE CORPORATION
(Exact name of Registrant as specified in its charter)

|                                         |  |                    
|---------------------------------------- |  | -------------------
|Delaware                                 |  | 95-2594724         
|(State or other jurisdiction of          |  | (IRS Employer      
|incorporation or organization)           |  | Identification No.)
|                                         |  |                    
|200 South Hoover Blvd., Suite 200        |  |                    
|Tampa, Florida                           |  | 33609              
|(Address of principal executive offices) |  | (Zip Code)         

(813) 288-4808
(Registrants telephone number, including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

|                                                    |  |                                          
|--------------------------------------------------- |  | -----------------------------------------
|Title of each class                                 |  | Name of each exchange on which registered
|                                                    |  |                                          
|Common Stock, Par Value $.01 per share              |  | Over The Counter Bulletin Board          
|7 1/2% Convertible Subordinated Debentures due 2010 |  | Over-the-Counter                         

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes [X]
   No [  ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]

The aggregate market value of voting stock held by non-affiliates of the
Registrant at August 19, 2002, was $4,080,005 based on the average bid and ask
price of the Common Stock on August 19, 2002, as reported on the Over The
Counter Bulletin Board.

At August 19, 2002, the Registrant had 3,885,719 shares of Common Stock
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Part III incorporates by reference to the Registrants definitive proxy
statement for the Registrants 2002 annual meeting of stockholders. The
definitive proxy statement will be filed no later than 120 days after the close
of the Registrants fiscal year ended May 31, 2002.





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TABLE OF CONTENTS



|                                 |  |  |  |  |  |  |  | 
|-------------------------------- |  |  |  |  |  |  |  | 
|PART I                          
|GOVERNMENT REGULATION           
|ACCREDITATION                   
|ADMINISTRATION AND EMPLOYEES    
|MANAGEMENT INFORMATION SYSTEMS  
|MARKETING AND SALES             
|PART II.                        
|PART III                        
|PART IV                         
|SIGNATURES                      
|Exhibit Index                   
|List of Subsidiaries            
|Eisner Consent                  
|Section 906 Certification of CEO
|Section 906 Certification of CFO



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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES




PART I

ITEM 1. BUSINESS

ORGANIZATIONAL HISTORY

Comprehensive Care Corporation® (the Company) is a Delaware Corporation
organized in 1969. Unless the context otherwise requires, all references to
the Company include the Companys principal operating subsidiary, Comprehensive
Behavioral Care, Inc.SM(1) (CompCare®(2) or CBC) and subsidiary
corporations.

The Company, through its operating subsidiaries, manages the delivery of a
continuum of psychiatric and substance abuse services to commercial, Medicare,
and Medicaid members on behalf of employers, health plans, including health
maintenance organizations (HMOs) and preferred provider organizations
(PPOs), government organizations, third-party claims administrators, and
commercial and other group purchasers of behavioral healthcare services.
Current services include a broad spectrum of inpatient and outpatient mental
health and substance abuse therapy, counseling, and supportive interventions.

RECENT DEVELOPMENTS



| |  | Effective July 22, 2002, the National Committee on Quality Assurance
(NCQA) has awarded Full Accreditation to Comprehensive Behavioral
Cares Southeast regional operations, extending CBCs accreditation to
July 22, 2005. This accreditation covers the Companys health plan
membership in Connecticut, Florida, Georgia, and Michigan (see Page 4
  ACCREDITATION).
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | During July 2002, the Company entered into a Repayment Agreement with
the California Department of Health Services to resolve the Medi-Cal
liability. This liability and the terms of the Repayment Agreement are
more fully described below under Item 3-(1), Legal Proceedings.                                                                                            
| |  | During April 2002, the Company implemented a new contract to provide
behavioral healthcare benefits to approximately 130,000 members in
Michigan. The Company estimates that annual revenues from this
contract will be $2.3 million.                                                                                                                                        

BUSINESS GENERAL

The services provided by the Company are delivered through management
service agreements, administrative service agreements, and capitated contracts.
Under capitated contracts, the primary payer of healthcare services pre-pays a
fixed, per member per month (PMPM) fee for covered psychiatric and substance
abuse services to the Company regardless of actual member utilization.
Programs are contracted through inpatient facilities as well as through
experienced outpatient practitioners.

The Company currently provides behavioral healthcare services to
recipients in seven states, primarily through subcontracts with health plans.
Members are usually directed to the Company by their employer, health plan, or
physician and receive an initial authorization for an assessment. Based upon
the initial assessment, a treatment plan is established for the member. The
programs and services currently offered by the Company include fully
integrated, capitated behavioral healthcare services, Employee Assistance
Programs (EAPs), case management/utilization review services, administrative
services management (ASOs), provider sponsored health plan development,
preferred provider network development, management and physician advisor
reviews, and overall care management services. Though not a significant part of
the Companys business as a percentage of revenue, the Company also manages
behavioral healthcare services in correctional settings or for parolees and
probationers in Idaho and may seek to pursue business in similar markets in the
future (see Growth Strategy below). Fully integrated capitated lives (i.e.
where the company has contractual, financial risk) totaled approximately
805,000 and 560,000 at May 31, 2002 and 2001, respectively. ASO lives were
approximately 375,000 and 295,000 at May 31, 2002 and 2001, respectively. EAP
lives were approximately 2,000 at May 31, 2002 and 2001. The Company manages
its clinical service programs using proven treatment technologies and trains
its providers to use effective, science-based treatment.

The Companys objective is to provide easily accessible, high quality
behavioral healthcare services and products and to manage its costs through
measures such as the monitoring of hospital inpatient admissions and the



---

|(1) |  | Comprehensive Behavioral Care, Inc. is a registered service mark of the Company.
|--- |  | --------------------------------------------------------------------------------
|(2) |  | CompCare is a registered trademark of Comprehensive Care Corporation.           

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review
of authorizations for various types of outpatient therapy. The goal is to
combine access to quality behavioral healthcare services with effective
management controls in order to ensure the most cost-effective use of
healthcare resources.

SOURCES OF REVENUE

The Company provides managed behavioral healthcare and substance abuse
services to recipients, primarily through subcontracts with HMOs who have
historically carved out these functions to third parties such as CompCare.
Generally, the Company receives a negotiated amount on a PMPM or capitated
basis in exchange for providing these services. The Company then contracts
directly with behavioral healthcare providers who receive a pre-determined
fee-for-service rate or case rate. Behavioral healthcare providers include
psychiatrists, clinical psychologists, hospitals, therapists, and other
licensed healthcare professionals. As of May 31, 2002, the Company has
approximately 5,600 behavioral healthcare practitioners in its network who are
primarily located in the four states in which the Company has its principal
contracts. Under such full-risk capitation arrangements, profit is a function
of utilization and the claims payments made by the Company to its network
providers.

Alternatively, the Company may subcontract with a network provider company
on a sub-capitated basis. In cases where the Company has made sub-capitation
arrangements, the outside company manages service delivery through a Company
approved and credentialed network that is guided by stringent quality
standards.

During Fiscal 2002, the Company provided services under capitated
arrangements for commercial, Medicare, Medicaid, and Childrens Health
Insurance Program patients in Florida and Texas, commercial and Medicaid
patients in Michigan, Medicaid patients in Connecticut, and commercial patients
in California, Georgia, Idaho, Kentucky and Ohio.

In Fiscal 2002, new business included one Medicaid and one commercial
contract in Michigan, and one PPO and one Medicaid contract in Texas. The
Company performs periodic reviews of its current contracts with payers to
determine profitability. In the event a contract is not profitable, the
company may seek to revise the terms of the contract or to terminate the
agreement in accordance with the specific contract terms.

GROWTH STRATEGY

The Companys objective is to expand its presence in both existing and new
managed behavioral healthcare markets by obtaining new contracts with health
plans, corporations, government agencies, and other payers through its
reputation of providing quality managed behavioral healthcare services with the
most cost-effective use of healthcare resources. The Companys principal means
for pursuing new business is through the submission of proposals in response
to formal, competitive bidding proceedings that are initiated by health plans
or government agencies. New products for existing and potential clients
include preferred provider organization management, psychotropic pharmacy
benefit management, and administrative service capacity management for public
systems.

CompCare has developed its behavioral corrections program and currently
has contracts in two states to provide behavioral healthcare services to
inmates and parolees. While this business is not currently a significant part
of the Companys business as a percentage of revenue, the Company believes that
the privatization of corrections healthcare services may continue to provide
opportunities for the Company to expand the number and scope of its contracts
with state and federal correctional facilities. Additionally, the Company is
developing products that will bring its core competencies to new market areas
such as child welfare, behavioral pharmacy management and preferred provider
organization product management for health plans and self-insured employers,
and juvenile justice behavioral health.

COMPETITION

The behavioral healthcare industry is highly competitive, with
approximately two-dozen managed behavioral healthcare companies providing
service for an estimated 209 million covered lives in the United States. The
industry provides products and services that are price sensitive. Competition
is also built around the quality of service provided and the extent of the
managed behavioral healthcare organizations network facilities.

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GOVERNMENT REGULATION

REGULATORY MONITORING AND COMPLIANCE

The Company is subject to extensive and evolving state and federal
regulations as well as changes in Medicaid and Medicare reimbursement that
could have an effect on the profitability of the Companys contracts. These
regulations range from licensure and compliance with regulations related to
insurance companies and other risk-assuming entities, to licensure and
compliance with regulations related to healthcare providers. These laws and
regulations may vary considerably among states. As a result, the Company may be
subject to the specific regulatory approach adopted by each state for
regulation of managed care companies and for providers of behavioral healthcare
treatment services. The Company is currently licensed in one state to operate
as a Limited Health Service Organization and is required to comply with certain
laws and regulations that, among other things, may require the Company to
maintain certain types of assets and minimum levels of deposits, capital,
surplus, reserves, or net worth. The Company holds licenses or certificates to
perform utilization review and third party administrator (TPA) services in
certain states. Certain of the services provided by the Companys managed
behavioral healthcare subsidiaries may be subject to such licensing
requirements in other states. There can be no assurance that additional
utilization review or TPA licenses will not be required or, if required, that
the Company will qualify to obtain such licenses. In many states, entities
that assume risk under contract with licensed insurance companies or health
plans have not been considered by state regulators to be conducting an
insurance or HMO business. As a result, the Company has not sought licensure
as either an insurer or HMO in certain states. If the regulatory positions of
these states were to change, the Companys business could be materially
affected until such time as the Company meets the regulatory requirements.
Currently, management cannot quantify the potential effects of additional
regulation of the managed care industry, but such costs will have an adverse
effect on further operations to the extent that they are not able to be
recouped in future managed care contracts.

As of May 31, 2002, the Company managed approximately 772,000 lives in
connection with behavioral and substance abuse services covered through
Medicaid in Connecticut, Florida, Michigan and Texas. In addition, the Company
manages approximately 33,000 lives covered through Medicare in Florida. Any
changes in Medicaid and Medicare reimbursement could ultimately affect the
Company through contract bidding and cost structures with the health plans
first impacted by such changes. At this time, the Company is unable to predict
what effect, if any, changes in Medicaid and Medicare legislation may have on
its business.

The Company is subject to the requirements of the Health Insurance
Portability and Accountability Act of 1996 (HIPAA). The purpose of the HIPAA
provisions is to improve the efficiency and effectiveness of the healthcare
system through standardization of the electronic data interchange of certain
administrative and financial transactions and, also, to protect the security
and privacy of transmitted information. Entities subject to HIPAA include all
healthcare providers and all healthcare plans. To meet the specific
requirements of HIPAA, the Company will incur costs to insure the adequacy and
security of its healthcare information system and communication networks.
Additionally, the Company may incur costs to implement the specific transaction
codes required by HIPAA for claims, payment, enrollment, eligibility, or to
become compliant with security and privacy rules, which may be more stringent
for providers of certain behavioral healthcare services. The expected
timetable to be compliant is currently October 2002 for transaction code
changes, although recent legislation allows for a one-year delay of this
compliance date if a formal compliance plan is filed by October 2002, and April
2003 for compliance with the privacy rules. The Company is currently
evaluating its systems and policies that are impacted by HIPAA. While these
efforts will be ongoing, the Company expects to meet all compliance rules and
timetables with respect to the HIPAA regulations. Failure to do so may result
in penalties and have a material adverse effect on the Companys ability to
retain its customers or to gain new business.




ACCREDITATION

To develop standards that effectively evaluate the structure and function
of medical and quality management systems in managed care organizations, the
National Committee on Quality Assurance, (NCQA) has developed an extensive
review and development process in conjunction with the managed care industry,
healthcare purchasers, state regulators, and consumers. The Standards for
Accreditation of Managed Behavioral Healthcare Organizations used by NCQA
reviewers to evaluate a managed behavioral healthcare organization address the
following areas: quality improvement; utilization management; credentialing;
members rights and responsibilities; preventative-care guidelines; and
medical records. These standards validate that a managed behavioral healthcare
organization is founded on principles of quality and is continuously improving
the clinical care and services it

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provides. In 2001, NCQA introduced these
standards to health plan accreditations and now requires more behavioral
healthcare expertise to maintain accreditation status. NCQA also utilizes
Health Plan Employer Data and Information Set (HEDIS), which is a core set of
performance measurements developed to respond to complex but clearly defined
employer needs as standards for patient care and customer satisfaction.
CompCares Southeast Region operation was awarded a one-year NCQA accreditation
in July 1999 and Full Accreditation in December 2000. Effective July 22,
2002, CompCares Full Accreditation award extends the NCQA accreditation to
July 22, 2005 and covers membership in Connecticut, Florida, Georgia, and
Michigan. Full Accreditation is granted for a period of three years to those
plans that have excellent programs for continuous quality improvement and that
meet NCQAs rigorous standards.

The Company believes its NCQA accreditation to be beneficial to its
clients and their members that are served by the Company. Additionally, NCQA
accreditation may be an important consideration to prospective clients of the
Company.




ADMINISTRATION AND EMPLOYEES

The Companys executive and administrative offices are located in Tampa,
Florida, where management maintains operations, business development,
accounting, reporting and information systems, and provider and member service
functions. The Company currently employs a total of 115 full-time and part-time
employees.




MANAGEMENT INFORMATION SYSTEMS

The Company utilizes a fully integrated information system designed as a
complete managed care, three-tier application. The system, known as Nichols
TXEN (TXEN), was developed by Nichols Research, and the Company is a licensed
user of the TXEN system.

All locations are strategically connected to the Companys frame relay
telecommunications network, allowing automated call-path routing to overlap
coverage for peak call times. Electronic access is provided and encouraged
between the Company and all provider groups wishing to participate in e-mail,
electronic billing, and electronic forms. Major care management functions such
as assessment information, service plans, initial authorizations, extension
requests, termination summaries, appeals, credentialing, billing, and
claim/encounter processing are backed by decision aids to correctly adjudicate
patient-specific transactions. The Company views the TXEN system to be adequate
for its current and future needs.




MARKETING AND SALES

The Companys business development staff is responsible for generating new
sales leads and for preparing proposals and responses to formal commercial and
public sector Requests for Proposals (RFPs). The Companys Chief Executive
Officer manages marketing initiatives, along with the Companys President of
Public Sector Services. Regional and administrative operations personnel
strengthen the Companys marketing efforts by providing a local presence.
Sales expectations are integrated into the performance requirements for
executive staff and local sales personnel.

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DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

The executive officers of the Company are as follows:

|                  |  |     |    |          |  |                                                                                             
|----------------- |  | --- | -- | -------- |  | --------------------------------------------------------------------------------------------
|Name              |  | Age |    | Position
|                  |  |     |    |         
|Thomas Clay       |  |     | 54 |          |  | President, Public Sector Services(2)                                                        
|Mary Jane Johnson |  |     | 52 |          |  | President(1)(2), Chief Executive Officer(1)(2), and Director(1)(2)                          
|Robert J. Landis  |  |     | 43 |          |  | Chairman of the Board of Directors(1)(2),
Chief Financial Officer(1)(2), and Treasurer(1)(2)
|Paul R. McCarthy  |  |     | 45 |          |  | Chief Operating Officer(2)                                                                  
|Howard A. Savin   |  |     | 56 |          |  | Director                                                                                    
|Cathy J. Welch    |  |     | 42 |          |  | Secretary(1)(2), Vice President of Finance/Controller(1)(2)                                 



---

|(1) Comprehensive Care Corporation.                                           
|------------------------------------------------------------------------------
|(2) Comprehensive Behavioral Care, Inc. (Principal subsidiary of the Company).

THOMAS CLAY, MSW, age 54. Mr. Clay has been employed by the Company since
December 1999 and has served as President, Public Sector Services, for
Comprehensive Behavioral Care, Inc. (CBC) since June 2002. Mr. Clay
previously served as CBCs Senior Vice President of Clinical Operations from
October 2000 through May 2002. During 1997, until joining the Company, Mr.
Clay worked as a behavioral healthcare consultant specializing in adapting
managed care technology to public sector services for providers and behavioral
healthcare organizations. From January 1991 through July 1997, Mr. Clay served
in a variety of executive positions for Tarrant County Mental Health Mental
Retardation Services in Fort Worth, Texas. Mr. Clay received a Master of
Social Work degree from Tulane University and a Bachelor of Arts Degree in
Psychology from the University of Texas at Austin.

MARY JANE JOHNSON, RN, MBA, age 52. Ms. Johnson has served as President
and Chief Executive Officer since January 2000. In April 1999, Ms. Johnson was
elected a Class I director with her current term expiring at the 2003 Annual
Meeting. Since joining the Company in August 1996, Ms. Johnson has also served
as Chief Operating Officer of Comprehensive Care Corporation, an appointment
that was effective July 1999, and as Chief Executive Officer for the Companys
principal subsidiary, Comprehensive Behavioral Care, Inc., since August 1998.
Ms. Johnson served as Executive Director for Merit Behavioral Care from 1993 to
1996. Ms. Johnson, a Registered Professional Nurse, has a Bachelors Degree in
Nursing from the State University of New York and a Masters Degree in Business
Administration from Adelphi University.

ROBERT J. LANDIS, CPA, MBA, age 43. Mr. Landis has served as Chairman of
the Board of Directors since January 2000 and as Chief Financial Officer and
Treasurer since July 1998. In April 1999, Mr. Landis was elected a Class III
director with his current term expiring at the 2004 Annual Meeting. Mr. Landis
served as Treasurer of Maxicare Health Plans, Inc., a health maintenance
organization, from November 1988 to July 1998. Mr. Landis also serves on the
Board of Directors of Appiant Technologies, Inc., a unified communication
software development company whose common stock is publicly traded on the
NASDAQ Small Cap Market. Mr. Landis, a Certified Public Accountant, received a
Bachelors Degree in Business Administration from the University of Southern
California and a Masters Degree in Business Administration from California
State University at Northridge.

PAUL R. MCCARTHY, Ph.D., age 45. Dr. McCarthy rejoined the Company in June
2002 to serve as Chief Operating Officer for Comprehensive Behavioral Care,
Inc. From January 2000 through May 2002, Dr. McCarthy was employed by Cigna
Behavioral Health (Cigna) in Tampa, Florida where as Director of Regional
Operations he was responsible for the oversight of operational and financial
aspects for two of Cignas largest operating units. Prior to joining Cigna,
Dr. McCarthy was employed by the Company from February 1998 through January
2000. Dr. McCarthy has also served as Vice President of Quality Improvement and
Outcomes Management for Green Spring Health Services/Magellan Health Services
from February 1996 through February 1998. Dr. McCarthy holds a Masters
Degree in Psychology from Villanova University and a Ph.D. from Pennsylvania
State University.

HOWARD A. SAVIN, Ph.D., age 56. In June 2002, Dr. Savin was appointed as
a Class II director, with a term expiring at the 2002 Annual Meeting, to fill
the existing vacancy of the Board of Directors. Dr. Savin is currently Senior
Vice President of Clinical Affairs at the Devereux Foundation, an organization
engaged in providing high-quality human services to children, adults, and
families with special needs which derive from

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behavioral, psychological,
intellectual or neurological impairments. Dr. Savin has served the Devereux
Foundation in this capacity since July 1995. Prior to joining the Devereux
Foundation, Dr. Savin served as Vice President of Medco Behavioral Care Corp.,
which later became Merit Behavioral Health and Magellan, from November 1993 to
December 1994. Dr. Savin holds a Masters Degree in Psychology from the
University of Bridgeport and a Ph.D. from the University of Georgia.

CATHY J. WELCH, CPA, age 42. Ms. Welch has been employed by the Company
since February 1998, has served as Controller since February 1999 and as
Corporate Secretary since her appointment on January 14, 2000. Beginning on
July 12, 1999, Ms. Welch is the Vice President of Finance and Controller. Prior
to her employment with the Company, Ms. Welch served in a variety of financial
management positions, beginning in November 1993 through June 1997, for the
Columbia/HCA hospitals in Florida. Ms. Welch, a Certified Public Accountant,
received a Bachelor of Arts Degree in Business Administration from the
University of South Florida.

ITEM 2. PROPERTIES

The Company does not currently own any real property. The following table
sets forth certain information regarding the properties leased by the Company
at May 31, 2002. All leases are triple net leases, under which the Company
bears all costs of operations, including insurance, taxes, and utilities.

|                                                                    |                                                                          |         |       |              |        |  |         |        | 
|------------------------------------------------------------------- | ------------------------------------------------------------------------ | ------- | ----- | ------------ | ------ |  | ------- | ------ | 
|                                                                    |                                                                          |         |       |              |        |  | Monthly
|                                                                    |                                                                          |         | Lease |              | Rental
|Name and Location                                                   |                                                                          | Expires |       | (in Dollars)
|                                                                    |                                                                          |         |       |             
|Corporate Headquarters, Regional, Administrative,
And Other Offices |                                                                          |         |       |              |        |  |         |       
|                                                                    | Tampa, Florida, Corporate Headquarters and
Southeastern Regional
offices |         |       | 2006         |        |  | $       | 21,509 | 
|                                                                    | Grand Prairie, Texas                                                     |         |       | 2002         |        |  |         | 6,815  | 
|                                                                    | Bloomfield Hills, Michigan                                               |         |       | 2004         |        |  |         | 8,378  | 
|                                                                    | Boise, Idaho*                                                            |         |       | 2002         |        |  | $       | 2,723  | 

* Effective June 30, 2002, the Companys Idaho operations were reduced as a
result of the termination of one contract which accounted for less than 2% of
operating revenues during Fiscal 2002. The Companys continuing Idaho business
is from prison-based programs requiring only minimal administrative support.
As a result, effective August 31, 2002, the Company expects to eliminate its
Idaho administrative office.

ITEM 3. LEGAL PROCEEDINGS



|(1) |  | On February 19, 1999, the California Superior Court denied the Companys
Petition for Writ of Mandate of an adverse administrative appeal decision
regarding application of the Maximum Inpatient Reimbursement Limitation to
Medi-Cal reimbursement paid to Brea Neuropsychiatric Hospital for its
fiscal periods 1983 through 1986. The Company owned this facility until
its disposal in fiscal year 1991. The subject matter of the Superior Court
action involved the refusal of the administrative law judge to order
further reductions in the liability for costs associated with treating
high cost, long stay Medi-Cal patients, which are commonly referred to as
outliers.                                                                                                                                                                         
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | Effective July 2002, the Company has entered into a Repayment Agreement with
the Department to resolve this liability at a substantially reduced amount.
The terms of the Repayment Agreement will require the Company to either 1)
pay one lump sum of $450,000 to the Department on or before September 1,
2002 or 2) beginning September 1, 2002, the Company will be required to make
three monthly installment payments of $160,000 each, with the last payment
being due on or before November 1, 2002, for a total of $480,000 as full and
complete satisfaction of the outstanding liability. If neither of the
arrangements discussed under 1) or 2) above is satisfied, the Company will
be considered to be in default and the Department has the right to collect
the full amount of the claim plus interest, attorneys fees, and collections
costs.
|   
|(2) |  | In connection with the filing of its Federal income tax returns for
fiscal years 1995 and 1996, the Company filed a tentative refund claim to
carry back losses described in Section 172(f) of the Internal Revenue Code
(IRC), requesting a refund to the Company of $9.4 million and $5.5
million, respectively, of which refunds of $9.4 million and $5.4 million
were received. In addition, the Company also filed amended Federal income
tax returns for fiscal years prior to 1995, requesting similar refunds of
losses carried back under Section 172(f) of $6.2 million for 1986; $0.4
million for 1985; $0.7 million for 1983; and $0.4 million for 1982, a
total of $7.7                                                                                                                                                                           

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| |  | million. Further, the Company entered into a fee arrangement
with its tax advisor that required the Company to advance its tax advisor
an amount equal to 20% of any state or federal refunds received. Such
fees were due and payable to the Companys tax advisor within 30 days upon
receipt of such tax refunds. However, if it is ultimately determined upon
examination and through appellate conference that such tax strategies are
unallowable, the Company is entitled to receive a pro rata refund from its
tax advisor of any fee that resulted from the disallowed item or items.                                                                                                                                                                                                                                                              
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | During fiscal years 1997 and 1996, the Company recognized a portion of the
refunds received as a tax benefit of $0.3 million and $2.4 million,
respectively. The balance of the refunds received, $12.1 million, is
recorded as a deferred liability, Unbenefitted tax refunds received
pending resolution by the Internal Revenue Service (IRS) of the
appropriateness of the Section 172(f) carryback. The additional refunds
requested under Section 172(f) for prior years of $7.7 million have not
been received, nor has the Company recognized any tax benefit related to
these potential refunds.                                                                                                                                                                                                                                               
|
| |  | Section 172(f) of the IRC provides for a ten-year net operating loss
carryback for specific losses attributable to (1) a product liability or
(2) a liability arising under a federal or state law or out of any tort if
the act giving rise to such liability occurs at least three years before
the beginning of the taxable year. The applicability of Section 172(f) to
the type of business in which the Company operates is unclear. No
assurance can be provided that the Company will be able to retain the
refunds received to date or that the additional refunds requested will be
received.                                                                                                                                                                                                                                                     
|
| |  | As a result of the Section 172(f) carryback claims filed by the Company,
and the tentative refunds received, the Company came under audit with
respect to the tax years previously mentioned.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | On August 21, 1998, the Company received an examination report, dated August
6, 1998, from the IRS advising the Company that it was disallowing $12.4
million of the $14.8 million of refunds previously received, and the
additional refunds requested of $7.7 million. If the position of the IRS
were to be upheld the Company would be required to repay $12.4 million in
refunds previously received, plus accrued interest of approximately $8.2
million through May 31, 2002. In this event, the Company would be entitled
to a repayment of the fees advanced to its tax advisor relating to these
refunds of approximately $2.5 million, which is reported as other
receivable in the accompanying balance sheets. The Company filed a protest
letter with the IRS on November 6, 1998. This filing commenced the
administrative appeals process.
|
| |  | On July 11, 2000, the Company submitted an Offer in Compromise (the Offer)
and, on March 13, 2002, submitted an amended Offer in Compromise (Amended
Offer) to the IRS to resolve the controversy with respect to the refunds at
a substantially reduced amount than the IRS has asserted as indicated above.
To assist the IRS in evaluating the Amended Offer, the Company is providing
additional documents to the IRS and is continuing its discussions with the
IRS. The Amended Offer must be reviewed and approved by the IRS. Pending
the resolution of the Amended Offer, the IRS generally suspends any
collection activities. There can be no assurance that the IRS will accept
the Amended Offer.                                                                                                                                          
|
| |  | If the IRS were to accept the Amended Offer, the IRS would require that the
net operating loss carryforwards are no longer available to the Company. If
the IRS were to disallow the refunds claimed and an offer is not accepted,
the Company will have additional loss carry forwards of approximately $50
million, which will expire if unused by the year 2010.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

From time to time, the Company and its subsidiaries are also parties to
and their property is subject to ordinary, routine litigation incidental to
their business. In some pending cases, claims may exceed insurance policy
limits and the Company or any one of its subsidiaries may have exposure to
liability that is not covered by insurance. Management believes that the
outcome of such lawsuits will not have a material adverse impact on the
Companys financial statements.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

During the fourth quarter of the fiscal year covered by this report, no
matters were submitted to a vote of security holders of the Company.

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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES




PART II.

|        |  |                                                                                                                                                                                                                                                                          
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ITEM 5. |  | MARKET FOR COMPANYS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                                                                                                                                                                                                       
|        |  |                                                                                                                                                                                                                                                                          
|        |  | The Companys Common Stock is traded on the Over The Counter
Bulletin Board (OTC-BB) under the symbol CHCR. The following table
sets forth the range of high and low closing prices for the Common Stock,
as reported by the OTC-BB, for the fiscal quarters indicated:

|            |      |      |  |                |  |       |      |  |  |   |      | 
|----------- | ---- | ---- |  | -------------- |  | ----- | ---- |  |  | - | ---- | 
|            |      |      |  |                |  | Price
|            |      |      |  |                |  |      
|FISCAL YEAR |      | High |  | Low           
|            |      |      |  |                |  |      
|            | 2002 |      |  | FIRST QUARTER  |  | $     | 0.61 |  |  | $ | 0.25 | 
|            |      |      |  | SECOND QUARTER |  |       | 0.55 |  |  |   | 0.24 | 
|            |      |      |  | THIRD QUARTER  |  |       | 0.96 |  |  |   | 0.43 | 
|            |      |      |  | FOURTH QUARTER |  | $     | 1.85 |  |  | $ | 0.70 | 
|            |      |      |  |                |  |       |      |  |  |   |      | 
|            | 2001 |      |  | FIRST QUARTER  |  | $     | 0.27 |  |  | $ | 0.17 | 
|            |      |      |  | SECOND QUARTER |  |       | 0.23 |  |  |   | 0.09 | 
|            |      |      |  | THIRD QUARTER  |  |       | 0.20 |  |  |   | 0.11 | 
|            |      |      |  | FOURTH QUARTER |  | $     | 0.64 |  |  | $ | 0.25 | 



|(a) |  | As of July 31, 2002, the Company had 1,427 common stockholders of record.                                                                                                                                                                                                                                                
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | The Company did not pay any cash dividends on its Common Stock during any
quarter of Fiscal 2002, 2001, or 2000 and does not contemplate the
initiation of payment of any cash dividends in the foreseeable future (see
Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS).

ITEM 6. SELECTED FINANCIAL DATA

Prior to Fiscal 1993, the Company principally engaged in the ownership,
operation, and management of psychiatric and substance abuse programs in
Company owned, leased, or unaffiliated hospitals. During Fiscal 1999, the
Company completed its plan to dispose of its hospital business segment. The
selected consolidated financial data that follows includes the results of
discontinued hospital operations for the fiscal years ended May 31, 1999 and
1998 and should be read in conjunction with the consolidated financial
statements and notes thereto appearing elsewhere in this report.
Reclassifications of prior year amounts have been made to conform to the
current years presentation (see Item 7  Managements Discussion and
Analysis of Financial Condition and Results of Operations).

9



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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

|                                                                                                |                                                       |   |                                               |        |      |   |         |        |      |   |         |        |   |   |        |        |   |   |        |        |  
|----------------------------------------------------------------------------------------------- | ----------------------------------------------------- | - | --------------------------------------------- | ------ | ---- | - | ------- | ------ | ---- | - | ------- | ------ | - | - | ------ | ------ | - | - | ------ | ------ | -
|                                                                                                |                                                       |   | Year Ended May 31,                           
|                                                                                                |                                                       |   |                                              
|                                                                                                |                                                       |   | 2002                                          |        | 2001 |   | 2000    |        | 1999 |   | 1998   
|                                                                                                |                                                       |   |                                               |        |      |   |         |        |      |   |        
|                                                                                                |                                                       |   | (Amounts in thousands, except per share data)
|Statement of Operations Data:                                                                   |                                                       |   |                                               |        |      |   |         |        |      |   |         |        |   |   |        |        |   |   |        |       
|Operating revenues                                                                              |                                                       | $ | 27,625                                        |        |      | $ | 18,192  |        |      | $ | 17,719  |        |   | $ | 39,029 |        |   | $ | 39,787 |       
|Costs and expenses:                                                                             |                                                       |   |                                               |        |      |   |         |        |      |   |         |        |   |   |        |        |   |   |        |       
|                                                                                                | Healthcare operating expenses                         |   |                                               | 24,625 |      |   |         | 15,326 |      |   |         | 15,801 |   |   |        | 29,778 |   |   |        | 30,808 |  
|                                                                                                | General and administrative expenses                   |   |                                               | 3,544  |      |   |         | 3,842  |      |   |         | 6,974  |   |   |        | 9,148  |   |   |        | 7,085  |  
|                                                                                                | Provision for (recovery of) doubtful accounts         |   |                                               | (112   | )    |   |         | (439   | )    |   |         | (606   | ) |   |        | 1,641  |   |   |        | 94     |  
|                                                                                                | Depreciation and amortization                         |   |                                               | 342    |      |   |         | 656    |      |   |         | 794    |   |   |        | 1,037  |   |   |        | 772    |  
|                                                                                                | Restructuring expenses                                |   |                                               |       |      |   |         | (30    | )    |   |         | 831    |   |   |        | 600    |   |   |        |       |  
|                                                                                                |                                                       |   |                                               |        |      |   |         |        |      |   |         |        |   |   |        |        |   |   |        |       
|                                                                                                |                                                       |   | 28,399                                        |        |      |   | 19,355  |        |      |   | 23,794  |        |   |   | 42,204 |        |   |   | 38,759 |       
|                                                                                                |                                                       |   |                                               |        |      |   |         |        |      |   |         |        |   |   |        |        |   |   |        |       
|Operating income (loss) from continuing operations                                              |                                                       |   | (774                                          | )      |      |   | (1,163  | )      |      |   | (6,075  | )      |   |   | (3,175 | )      |   |   | 1,028  |       
|Other income (expenses):                                                                        |                                                       |   |                                               |        |      |   |         |        |      |   |         |        |   |   |        |        |   |   |        |       
|                                                                                                | Loss in connection with prepayment of note receivable |   |                                               |       |      |   |         | (496   | )    |   |         |       |   |   |        |       |   |   |        |       |  
|                                                                                                | Gain on sale of assets                                |   |                                               |       |      |   |         |       |      |   |         | 9      |   |   |        | 2      |   |   |        | 314    |  
|                                                                                                | Loss on sale of assets                                |   |                                               |       |      |   |         |       |      |   |         | (1     | ) |   |        | (4     | ) |   |        | (9     | )
|                                                                                                | Reduction in accrued interest expense                 |   |                                               |       |      |   |         | 290    |      |   |         |       |   |   |        |       |   |   |        |       |  
|                                                                                                | Other non operating income (expense)                  |   |                                               | 40     |      |   |         | 332    |      |   |         | 204    |   |   |        | (79    | ) |   |        | 50     |  
|                                                                                                | Interest income                                       |   |                                               | 88     |      |   |         | 163    |      |   |         | 399    |   |   |        | 309    |   |   |        | 406    |  
|                                                                                                | Interest expense                                      |   |                                               | (178   | )    |   |         | (208   | )    |   |         | (289   | ) |   |        | (281   | ) |   |        | (172   | )
|                                                                                                |                                                       |   |                                               |        |      |   |         |        |      |   |         |        |   |   |        |        |   |   |        |       
|Income (loss) from continuing operations before income taxes                                    |                                                       |   | (824                                          | )      |      |   | (1,082  | )      |      |   | (5,753  | )      |   |   | (3,228 | )      |   |   | 1,617  |       
|Income tax expense (benefit)                                                                    |                                                       |   | 1                                             |        |      |   | 35      |        |      |   | 13      |        |   |   | (146   | )      |   |   | 63     |       
|                                                                                                |                                                       |   |                                               |        |      |   |         |        |      |   |         |        |   |   |        |        |   |   |        |       
|Income (loss) from continuing operations                                                        |                                                       |   | (825                                          | )      |      |   | (1,117  | )      |      |   | (5,766  | )      |   |   | (3,082 | )      |   |   | 1,554  |       
|Discontinued operations:                                                                        |                                                       |   |                                               |        |      |   |         |        |      |   |         |        |   |   |        |        |   |   |        |       
|Income (loss) from operations                                                                   |                                                       |   |                                              |        |      |   |        |        |      |   |        |        |   |   | (334   | )      |   |   | 417    |       
|Loss on disposal, including operating loss of $282                                              |                                                       |   |                                              |        |      |   |        |        |      |   |        |        |   |   | (698   | )      |   |   |       |       
|                                                                                                |                                                       |   |                                               |        |      |   |         |        |      |   |         |        |   |   |        |        |   |   |        |       
|Income (loss) before extraordinary item and cumulative
effect of change in accounting principle |                                                       |   | (825                                          | )      |      |   | (1,117  | )      |      |   | (5,766  | )      |   |   | (4,114 | )      |   |   | 1,971  |       
|Extraordinary gain                                                                              |                                                       |   |                                              |        |      |   |        |        |      |   |        |        |   |   | 120    |        |   |   |       |       
|                                                                                                |                                                       |   |                                               |        |      |   |         |        |      |   |         |        |   |   |        |        |   |   |        |       
|Income (loss) before cumulative effect of change in
accounting principle                        |                                                       |   | (825                                          | )      |      |   | (1,117  | )      |      |   | (5,766  | )      |   |   | (3,994 | )      |   |   | 1,971  |       
|Cumulative effect of change in accounting principle                                             |                                                       |   | 55                                            |        |      |   |        |        |      |   |        |        |   |   |       |        |   |   |       |       
|                                                                                                |                                                       |   |                                               |        |      |   |         |        |      |   |         |        |   |   |        |        |   |   |        |       
|Net income (loss)                                                                               |                                                       |   | (770                                          | )      |      |   | (1,117  | )      |      |   | (5,766  | )      |   |   | (3,994 | )      |   |   | 1,971  |       
|Dividends on convertible Preferred Stock                                                        |                                                       |   |                                              |        |      |   |        |        |      |   |        |        |   |   | (55    | )      |   |   | (82    | )     
|                                                                                                |                                                       |   |                                               |        |      |   |         |        |      |   |         |        |   |   |        |        |   |   |        |       
|Net income (loss) attributable to common stockholders                                           |                                                       | $ | (770                                          | )      |      | $ | (1,117  | )      |      | $ | (5,766  | )      |   | $ | (4,049 | )      |   | $ | 1,889  |       
|                                                                                                |                                                       |   |                                               |        |      |   |         |        |      |   |         |        |   |   |        |        |   |   |        |       
|Basic earnings per share:                                                                       |                                                       |   |                                               |        |      |   |         |        |      |   |         |        |   |   |        |        |   |   |        |       
|Income (loss) from continuing operations                                                        |                                                       | $ | (0.21                                         | )      |      | $ | (0.29   | )      |      | $ | (1.51   | )      |   | $ | (0.88  | )      |   | $ | 0.44   |       
|Discontinued operations:                                                                        |                                                       |   |                                               |        |      |   |         |        |      |   |         |        |   |   |        |        |   |   |        |       
|                                                                                                | Income (loss) from operations                         |   |                                               |       |      |   |         |       |      |   |         |       |   |   |        | (0.09  | ) |   |        | 0.12   |  
|                                                                                                | Loss on disposal                                      |   |                                               |       |      |   |         |       |      |   |         |       |   |   |        | (0.20  | ) |   |        |       |  
|Extraordinary item                                                                              |                                                       |   |                                              |        |      |   |        |        |      |   |        |        |   |   | 0.03   |        |   |   |       |       
|Cumulative effect of change in accounting principle                                             |                                                       |   | 0.01                                          |        |      |   |        |        |      |   |        |        |   |   |       |        |   |   |       |       
|                                                                                                |                                                       |   |                                               |        |      |   |         |        |      |   |         |        |   |   |        |        |   |   |        |       
|Net income (loss)                                                                               |                                                       | $ | (0.20                                         | )      |      | $ | (0.29   | )      |      | $ | (1.51   | )      |   | $ | (1.14  | )      |   | $ | 0.56   |       
|                                                                                                |                                                       |   |                                               |        |      |   |         |        |      |   |         |        |   |   |        |        |   |   |        |       
|Diluted earnings per share:                                                                     |                                                       |   |                                               |        |      |   |         |        |      |   |         |        |   |   |        |        |   |   |        |       
|Income (loss) from continuing operations                                                        |                                                       | $ | (0.21                                         | )      |      | $ | (0.29   | )      |      | $ | (1.51   | )      |   | $ | (0.88  | )      |   | $ | 0.40   |       
|Discontinued operations:                                                                        |                                                       |   |                                               |        |      |   |         |        |      |   |         |        |   |   |        |        |   |   |        |       
|                                                                                                | Income (loss) from operations                         |   |                                               |       |      |   |         |       |      |   |         |       |   |   |        | (0.09  | ) |   |        | 0.11   |  
|                                                                                                | Loss on disposal                                      |   |                                               |       |      |   |         |       |      |   |         |       |   |   |        | (0.20  | ) |   |        |       |  
|Extraordinary item                                                                              |                                                       |   |                                              |        |      |   |        |        |      |   |        |        |   |   | 0.03   |        |   |   |       |       
|Cumulative effect of change in accounting principle                                             |                                                       |   | 0.01                                          |        |      |   |        |        |      |   |        |        |   |   |       |        |   |   |       |       
|                                                                                                |                                                       |   |                                               |        |      |   |         |        |      |   |         |        |   |   |        |        |   |   |        |       
|Net income (loss)                                                                               |                                                       | $ | (0.20                                         | )      |      | $ | (0.29   | )      |      | $ | (1.51   | )      |   | $ | (1.14  | )      |   | $ | 0.51   |       
|                                                                                                |                                                       |   |                                               |        |      |   |         |        |      |   |         |        |   |   |        |        |   |   |        |       
|BALANCE SHEET DATA:                                                                             |                                                       |   |                                               |        |      |   |         |        |      |   |         |        |   |   |        |        |   |   |        |       
|Working capital (deficit)                                                                       |                                                       | $ | (12,275                                       | )      |      | $ | (11,770 | )      |      | $ | (12,245 | )      |   | $ | (9,355 | )      |   | $ | (8,859 | )     
|Total assets                                                                                    |                                                       |   | 11,399                                        |        |      |   | 9,754   |        |      |   | 21,275  |        |   |   | 29,066 |        |   |   | 30,405 |       
|Long-term debt                                                                                  |                                                       |   | 2,244                                         |        |      |   | 2,244   |        |      |   | 2,244   |        |   |   | 2,253  |        |   |   | 2,704  |       
|Long-term debt including current maturities and debentures                                      |                                                       |   | 2,244                                         |        |      |   | 2,244   |        |      |   | 2,244   |        |   |   | 2,256  |        |   |   | 2,706  |       
|Stockholders deficit                                                                           |                                                       | $ | (12,519                                       | )      |      | $ | (11,778 | )      |      | $ | (10,672 | )      |   | $ | (4,914 | )      |   | $ | (1,286 | )     

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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

|        |  |                                                                                      
|------- |  | -------------------------------------------------------------------------------------
|Item 7. |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

This Annual Report on Form 10-K includes forward-looking statements, the
realization of which may be impacted by certain important factors discussed
below under Risk Factors  Important Factors Related to Forward-Looking
Statements and Associated Risks.

GENERAL

The Company reported a net loss of $770,000, or $0.20 per share, for the
fiscal year ended May 31, 2002 compared to the net loss of $1.1 million, or
$0.29 per share, for the fiscal year ended May 31, 2001. The Fiscal 2002 net
loss included $55,000 specific to the cumulative effect of a change in
accounting principle (see Note 10 to the audited financial statements 
Goodwill) and a $66,000 bad debt recovery specific to one contract that
terminated in Fiscal 1999. The following tables summarize the Companys
financial data for the fiscal years ended May 31, 2002 and 2001 (in thousands):

|                                |                |   |              |      |              |   |        |        |  
|------------------------------- | -------------- | - | ------------ | ---- | ------------ | - | ------ | ------ | -
|                                |                |   | CONSOLIDATED |      | CONSOLIDATED
|                                |                |   | OPERATIONS   |      | OPERATIONS  
|                                |                |   | FISCAL 2002  |      | FISCAL 2001 
|                                |                |   |              |      |             
|Operating revenues              |                | $ | 27,625       |      |              | $ | 18,192 |       
|                                |                |   |              |      |              |   |        |       
|Healthcare operating expenses   |                |   | 24,625       |      |              |   | 15,326 |       
|General/administrative expenses |                |   | 3,544        |      |              |   | 3,842  |       
|Other operating expenses        |                |   | 230          |      |              |   | 187    |       
|                                |                |   |              |      |              |   |        |       
|                                |                |   | 28,399       |      |              |   | 19,355 |       
|                                |                |   |              |      |              |   |        |       
|                                | Operating loss |   | $            | (774 | )            |   | $      | (1,163 | )
|                                |                |   |              |      |              |   |        |       

RESULTS OF OPERATIONS  YEAR ENDED MAY 31, 2002 COMPARED TO THE YEAR ENDED MAY 31, 2001.

The Company reported a net loss of $770,000 and an operating loss of
$774,000 for the fiscal year ended May 31, 2002 compared to the operating loss
of $1.2 million for the fiscal year ended May 31, 2001. Operating revenues
increased by 51.9%, or $9.4 million, to $27.6 million for the fiscal year ended
May 31, 2002 compared to $18.2 million for the fiscal year ended May 31, 2001.
This increase is attributable to two major contracts implemented during Fiscal
2001 and membership growth from state sponsored childrens health insurance
programs.

Healthcare operating expenses increased by approximately $9.3 million, or
60.7%, for the fiscal year ended May 31, 2002 as compared to the fiscal year
ended May 31, 2001. This increase is directly attributable to revenue growth as
described above. Healthcare operating expense as a percentage of operating
revenue increased by 4.8%, from 84.3% for the fiscal year ended May 31, 2001 to
89.1% for the fiscal year ended May 31, 2002. This increase is primarily
attributable to a change in revenue mix resulting in increased Medicaid and
Medicare membership during Fiscal 2002 compared to Fiscal 2001.

General and administrative expenses decreased by approximately $0.3
million, or 7.8%, for the fiscal year ended May 31, 2002 as compared to the
fiscal year ended May 31, 2001. This decrease is attributable to the Companys
continuing efforts to reduce general and administrative costs. General and
administrative expense as a percentage of operating revenue decreased from
21.1% for the fiscal year ended May 31, 2001 to 12.8% for the fiscal year ended
May 31, 2002.

Other operating expenses increased $43,000 for the fiscal year ended May
31, 2002 compared to the fiscal year ended May 31, 2001. This increase is
primarily attributable to the $327,000 reduction in the amount of recovery of
doubtful accounts year over year, offset by a $242,000 decrease in depreciation
expense, which results from assets being fully depreciated and, also, from
decreases in capital spending. Additionally, Fiscal 2002 results do not
include any amortization expense compared to $72,000 of amortization expense
recorded during the fiscal year ended May 31, 2001 (see Note 10 to the audited
financial statements  Goodwill).

Management believes that the Companys current infrastructure is
sufficient to support continued revenue growth during Fiscal 2003 without the
need for any significant increase to staff or other operating costs.

11



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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

RESULTS OF OPERATIONS  YEAR ENDED MAY 31, 2001 COMPARED TO THE YEAR ENDED MAY 31, 2000.

The Company reported a net loss of $1.1 million and an operating loss of
$1.2 million for the fiscal year ended May 31, 2001. Operating revenues
increased by $0.5 million, or 2.7%, for the fiscal year ended May 31, 2001
compared to the fiscal year ended May 31, 2000. This increase is attributable
to the implementation in Fiscal 2001 of two major, managed care contracts which
accounted for $4.1 million of operating revenues during the fiscal year ended
May 31, 2001, offset by the loss of revenues during Fiscal 2001 specific to the
Humana contracts and the loss of two major contracts that terminated during the
third quarter of Fiscal 2000.

Healthcare operating expenses decreased by approximately $0.5 million, or
3.0%, for the fiscal year ended May 31, 2001 as compared to the fiscal year
ended May 31, 2000. This decrease is attributable to the cost savings realized
from the centralization of certain contract management and clinical functions
that began in Fiscal 2000. Healthcare operating expense as a percentage of
operating revenue decreased from 89.2% for the fiscal year ended May 31, 2000
to 84.3% for the fiscal year ended May 31, 2001.

General and administrative expenses decreased by approximately $3.1
million, or 44.9%, for the fiscal year ended May 31, 2001 as compared to the
fiscal year ended May 31, 2000. General and administrative expense as a
percentage of revenue decreased from 39.4% for the fiscal year ended May 31,
2000 to 21.1% for the fiscal year ended May 31, 2001. This decrease is
attributable to the significant cost reductions that were initiated following
the loss of two major, managed care contracts in Fiscal 2000.

Other operating expenses decreased by $0.8 million for the fiscal year
ended May 31, 2001 compared to the fiscal year ended May 31, 2000. This
decrease is primarily attributable to the $0.8 million of restructuring expense
in Fiscal 2000.

LIQUIDITY AND CAPITAL RESOURCES

At May 31, 2002, the Company had unrestricted cash and cash equivalents of
$5.3 million. The Company has committed approximately $0.5 million for use in
connection with the Repayment Agreement described under Item 3(1)  Legal
Proceedings above. During the fiscal year ended May 31, 2002, $2.5 million
was provided by the Companys operating activities, of which $1.2 million was
provided as a result of timing differences between the collection of state
reinsurance program amounts and the payment dates for reinsurance claims
specific to one major contract (see Note 4, Item 2, to the audited financial
statements  Major Contracts/Customers). The Company reported a net loss of
approximately $770,000 for the fiscal year ended May 31, 2002, which includes a
$55,000 gain specific to the cumulative effect of a change in accounting
principle (see Note 10 to the audited financial statements  Goodwill) and a
$66,000 bad debt recovery related to one contract that terminated in Fiscal
1999. This compares to a net loss of $1.1 million for the fiscal year ended May
31, 2001. The Company has an accumulated deficit of $64.4 million and total
stockholders deficit of $12.5 million as of May 31, 2002. Additionally, the
Companys current assets at May 31, 2002 amounted to approximately $9.4 million
and current liabilities were approximately $21.7 million, resulting in a
working capital deficiency of approximately $12.3 million. The working capital
deficiency referred to above results primarily from a $12.1 million liability
related to Federal income tax refunds received in prior years. The ultimate
outcome of the Internal Revenue Service audit whereby it is seeking recovery of
the refunds from the Company, including the amount to be repaid, if any, and
the timing thereof, is not determinable (see Note 14 to the audited financial
statements  Income Taxes). Additionally, the Company cannot predict
utilization trends, which could change significantly in future periods. Any
such negative trends would increase healthcare operating expenses and may
impact the Companys ability to achieve profitability and maintain positive
cash flow.

The Company has a long-term debt obligation of approximately $2.2 million
specific to its 7 1/2% convertible subordinated debentures, which are due in
April 2010. By reason of the terms of the indenture, the Company is required
to make semi-annual interest payments to its debenture holders in April and
October of each year, but is not required to make any principal payments,
sinking fund payments, or to redeem any securities prior to maturity in 2010.
The debentures are convertible into approximately 9,000 shares of Common Stock
at a conversion price of $248.12 per share.

Management cannot state with any degree of certainty whether any required
additional equity or debt financing will be available to it during Fiscal 2003
and, if available, that the source of financing would be available

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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

on terms and
conditions acceptable to the Company. The Company does not currently engage in
transactions relating to market sensitive risk instruments.

The above conditions raise substantial doubt about the Companys ability
to continue as a going concern. The accompanying consolidated financial
statements do not include any adjustment that may result from the outcome of
this uncertainty.

During Fiscal 2001 and Fiscal 2000, management took steps to trim costs
and save cash, including making significant staff reductions, centralizing
certain contract management and clinical functions, and eliminating the
Companys California administrative office and related executive staff
positions. The Companys continuation as a going concern is dependent upon its
ability to achieve profitability, to generate sufficient cash flow to meet its
obligations on a timely basis, and to obtain additional financing as may be
required.

RISK FACTORS

IMPORTANT FACTORS RELATED TO FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS

This Annual Report on Form 10-K contains certain forward-looking
statements that are based on current expectations and involve a number of risks
and uncertainties. Factors that may materially affect revenues, expenses and
operating results include, without limitation, the Companys success in (i)
expanding the managed behavioral healthcare operations, (ii) effective
management in the delivery of services, (iii) risk and utilization in context
of capitated payouts, and (iv) retaining certain refunds from the IRS (see Note
14 to the audited consolidated financial statements   Income Taxes).

CONCENTRATION OF RISK

The Company currently has twelve contracts with four health plans to
provide behavioral healthcare services under commercial, Medicaid, and Medicare
plans, to contracted members in Connecticut, Florida and Texas. These combined
contracts represent approximately 57.9% and 49.9% of the Companys operating
revenue for the fiscal years ended May 31, 2002 and 2001, respectively. The
terms of each contract are generally for one-year periods and are automatically
renewable for additional one-year periods unless terminated by either party.
The loss of any one of these customers could have a material, adverse effect on
the Companys working capital and future results of operations (see Note 4 to
the audited consolidated financial statements  Major Customers/Contracts).

UNCERTAINTY OF FUTURE PROFITABILITY

As of May 31, 2002, the Company had stockholders deficit of $12.5 million
and a working capital deficiency of approximately $12.3 million. The Company
had a net loss for the fiscal year ended May 31, 2002 of approximately
$770,000. There can be no assurance that the Company will be able to achieve
and sustain profitability or that the Company can maintain positive cash flow
on an ongoing basis. Present results of operations are not necessarily
indicative of anticipated future results of operations.

NEED FOR ADDITIONAL FUNDS; UNCERTAINTY OF FUTURE FUNDING

During recent fiscal years, a principal source of liquidity has been the
sale of hospital facilities. During Fiscal 1999, the Company completed its
plan to dispose of its hospital business segment and as such, does not
currently own any hospital facilities. Subject to various market conditions,
an additional source of liquidity could be the issuance of additional equity
securities, which could result in substantial dilution to stockholders.

The Company may be required to repay a portion of the tax refunds received
from the Internal Revenue Service for Fiscal 1996 and 1995, which amounted to
$9.4 million and $5.4 million, respectively (see Item 3-(2)  Legal
Proceedings, above).

TAXES

In connection with the filing of its Federal income tax returns for fiscal
years 1995 and 1996, the Company filed a tentative refund claim to carry back
losses described in Section 172(f) of the Internal Revenue Code (IRC),
requesting a refund to the Company of $9.4 million and $5.5 million,
respectively, of which refunds of $9.4 million

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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

and $5.4 million were received.
In addition, the Company also filed amended Federal income tax returns for
fiscal years prior to 1995, requesting similar refunds of losses carried back
under Section 172(f) of $6.2 million for 1986; $0.4 million for 1985; $0.7
million for 1983; and $0.4 million for 1982, a total of $7.7 million. Further,
the Company entered into a fee arrangement with its tax advisor that required
the Company to advance its tax advisor an amount equal to 20% of any state or
federal refunds received. Such fees were due and payable to the Companys tax
advisor within 30 days upon receipt of such tax refunds. However, if it is
ultimately determined upon examination and through appellate conference that
such tax strategies are unallowable, the Company is entitled to receive a pro
rata refund from its tax advisor of any fee that resulted from the disallowed
item or items.

During fiscal years 1997 and 1996, the Company recognized a portion of
the refunds received as a tax benefit of $0.3 million and $2.4 million,
respectively. The balance of the refunds received, $12.1 million, is recorded
as a deferred liability, Unbenefitted tax refunds received pending
resolution by the Internal Revenue Service (IRS) of the appropriateness of
the Section 172(f) carryback. The additional refunds requested under Section
172(f) for prior years of $7.7 million have not been received, nor has the
Company recognized any tax benefit related to these potential refunds.

Section 172(f) of the IRC provides for a ten-year net operating loss
carryback for specific losses attributable to (1) a product liability or (2) a
liability arising under a federal or state law or out of any tort if the act
giving rise to such liability occurs at least three years before the beginning
of the taxable year. The applicability of Section 172(f) to the type of
business in which the Company operates is unclear. No assurance can be
provided that the Company will be able to retain the refunds received to date
or that the additional refunds requested will be received.

As a result of the Section 172(f) carryback claims filed by the Company,
and the tentative refunds received, the Company came under audit with respect
to the tax years previously mentioned.

On August 21, 1998, the Company received an examination report, dated
August 6, 1998, from the IRS advising the Company that it was disallowing $12.4
million of the $14.8 million of refunds previously received, and the additional
refunds requested of $7.7 million. If the position of the IRS were to be
upheld the Company would be required to repay $12.4 million in refunds
previously received, plus accrued interest of approximately $8.2 million
through May 31, 2002. In this event, the Company would be entitled to a
repayment of the fees advanced to its tax advisor relating to these refunds of
approximately $2.5 million, which is reported as other receivable in the
accompanying balance sheets. The Company filed a protest letter with the IRS
on November 6, 1998. This filing commenced the administrative appeals process.

On July 11, 2000, the Company submitted an Offer in Compromise (the
Offer) and, on March 13, 2002, submitted an amended Offer in Compromise
(Amended Offer) to the IRS to resolve the controversy with respect to the
refunds at a substantially reduced amount than the IRS has asserted as
indicated above. To assist the IRS in evaluating the Amended Offer, the
Company is providing additional documents to the IRS and is continuing its
discussions with the IRS. The Amended Offer must be reviewed and approved by
the IRS. Pending the resolution of the Amended Offer, the IRS generally
suspends any collection activities. There can be no assurance that the IRS
will accept the Amended Offer.

If the IRS were to accept the Amended Offer, the IRS would require that
the net operating loss carryforwards are no longer available to the Company.
If the IRS were to disallow the refunds claimed and an offer is not accepted,
the Company will have additional loss carry forwards of approximately $50
million, which will expire if unused by the year 2010.

UNCERTAINTY OF PRICING; HEALTHCARE REFORM AND RELATED MATTERS

Managed care operations are at risk for costs incurred to supply agreed
upon levels of service. Failure to anticipate or control costs could have
material, adverse effects on the Company.  Additionally, the business of
providing services on a full-risk capitation basis exposes the Company to the
additional risk that contracts negotiated and entered into may ultimately be
determined to be unprofitable if utilization levels require the Company to
deliver and provide services at capitation rates which do not account for or
factor in such utilization levels.

The Company typically
contracts with small to medium sized HMOs who may be adversely affected by the continuing efforts of governmental and third party payers to
contain or reduce the costs of healthcare through various means. The Company's clients may
also be acquired by larger HMO's, in which case there can be no
assurance that the acquiring company would renew the Company's
contract.  Additionally,
changes specific to Medicaid and Medicare reimbursement could have an effect on
the profitability of

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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

the Companys contracts. The Company cannot predict the
effect healthcare reforms may have on its business and no assurance can be
given that any such reforms will not have a material adverse effect on the
Company.

REGULATORY COMPLIANCE

The Company is subject to extensive and evolving state and federal
regulations as well as changes in Medicaid and Medicare reimbursement that
could have an effect on the profitability of the Companys contracts. These
regulations range from licensure and compliance with regulations related to
insurance companies and other risk-assuming entities, to licensure and
compliance with regulations related to healthcare providers. These laws and
regulations may vary considerably among states. As a result, the Company may be
subject to the specific regulatory approach adopted by each state for
regulation of managed care companies and for providers of behavioral healthcare
treatment services. The Company is currently licensed in one state to operate
as a Limited Health Service Organization and is required to comply with certain
laws and regulations that, among other things, may require the Company to
maintain certain types of assets and minimum levels of deposits, capital,
surplus, reserves, or net worth. The Company holds licenses or certificates to
perform utilization review and third party administrator (TPA) services in
certain states. Certain of the services provided by the Companys managed
behavioral healthcare subsidiaries may be subject to such licensing
requirements in other states. There can be no assurance that additional
utilization review or TPA licenses will not be required or, if required, that
the Company will qualify to obtain such licenses. In many states, entities
that assume risk under contract with licensed insurance companies or health
plans have not been considered by state regulators to be conducting an
insurance or HMO business. As a result, the Company has not sought licensure
as either an insurer or HMO in certain states. If the regulatory positions of
these states were to change, the Companys business could be materially
affected until such time as the Company meets the regulatory requirements.
Currently, management cannot quantify the potential effects of additional
regulation of the managed care industry, but such costs will have an adverse
effect on further operations to the extent that they are not able to be
recouped in future managed care contracts.

DEPENDENCE ON KEY PERSONNEL

The Company depends and will continue to depend upon the services of its
senior management and skilled personnel.

SHARES ELIGIBLE FOR FUTURE SALE

The Company has issued or committed to issue options or other rights to
purchase approximately 1,101,000 shares, with option prices range from $0.25 to
$4.00. The Company may contemplate issuing additional amounts of debt, equity
or convertible securities in public or private transactions for use in
fulfilling its future capital needs (see Need for Additional Funds;
Uncertainty of Future Funding). Issuance of additional equity could adversely
affect the trading price of the Companys Common Stock.

ANTI-TAKEOVER PROVISIONS

The Companys Restated Certificate of Incorporation provides for 60,000
authorized shares of Preferred Stock, the rights, preferences, qualifications,
limitations and restrictions of which may be fixed by the Board of Directors
without any vote or action by the stockholders that could have the effect of
diluting the Common Stock or reducing working capital that would otherwise be
available to the Company. As of May 31, 2002, there are 18,740 remaining shares
authorized and available to issue, and no outstanding shares of Preferred
Stock. The Companys Restated Certificate of Incorporation also provides for a
classified board of directors with directors divided into three classes serving
staggered terms. The Companys stock option plans generally provide for the
acceleration of vesting of options granted under such plans in the event of
certain transactions that result in a change of control of the Company.
Section 203 of the General Corporation Law of Delaware prohibits the Company
from engaging in certain business combinations with interested stockholders.
These provisions may have the effect of delaying or preventing a change in
control of the Company without action by the stockholders and therefore could
adversely affect the price of the Companys Common Stock or the possibility of
sale of shares to an acquiring person.

Assumptions relating to the foregoing involve judgments that are difficult
to predict accurately and are subject to many factors that can materially
affect results. Budgeting and other management decisions are subjective in
many respects and thus susceptible to interpretations and periodic revisions
based on actual experience and business developments, the impact of which may
cause the Company to alter its budgets which may in turn affect the Companys
results. In light of the factors that can materially affect the
forward-looking information included

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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives or plans of the Company will be achieved.

SARBANES-OXLEY ACT OF 2002

The Company is subject to the various provisions of the Sarbanes-Oxley Act
of 2002, which include a requirement that the Company must have at least one
qualified, financial expert on its independent audit committee or be subject to
not having its stock included in the Over The Counter Bulletin Board listings.
The Company has until April 2003 to comply with this requirement.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

Index to Consolidated Financial Statements and
Financial Statement Schedules

Years Ended May 31, 2002, 2001 and 2000

|                                                                                          |  |  |       | 
|----------------------------------------------------------------------------------------- |  |  | ----- | 
|Report of Eisner, LLP                                                                     |  |  | 18    | 
|Consolidated Balance Sheets, May 31, 2002 and 2001                                        |  |  | 19    | 
|Consolidated Statements of Operations, Years Ended May 31, 2002, 2001 and 2000            |  |  | 20    | 
|Consolidated Statements of Stockholders Deficit, Years Ended May 31, 2002, 2001 and 2000 |  |  | 21    | 
|Consolidated Statements of Cash Flows, Years Ended May 31, 2002, 2001 and 2000            |  |  | 22    | 
|Notes to Consolidated Financial Statements, Years Ended May 31, 2002, 2001 and 2000       |  |  | 23-36 | 

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INDEPENDENT AUDITORS REPORT

Board of Directors and Stockholders
Comprehensive Care Corporation

We have audited the accompanying consolidated balance sheets of
Comprehensive Care Corporation and subsidiaries as of May 31, 2002 and 2001,
and the related consolidated statements of operations, stockholders deficit
and cash flows for each of the three years in the period ended May 31, 2002.
These financial statements are the responsibility of the Companys management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Comprehensive Care Corporation and subsidiaries as of May 31, 2002 and 2001,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended May 31, 2002, in conformity with
accounting principles generally accepted in the United States of America.

As discussed in Note 3, the Companys working capital deficiency and
stockholders deficit raise substantial doubt about its ability to continue as
a going concern. Managements plans as to these matters are described in Note
14. The accompanying consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.

As discussed in Note 2, effective June 1, 2001, the Company adopted
Statement of Financial Accounting Standards No. 142 and changed its method of
accounting for goodwill.

/s/ Eisner, LLP (formerly Richard A. Eisner & Company, LLP)

New York, New York
August 2, 2002

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CONSOLIDATED BALANCE SHEETS

|                                               |                                                                                                             |   |                        |         |      |   |         |         |  
|---------------------------------------------- | ----------------------------------------------------------------------------------------------------------- | - | ---------------------- | ------- | ---- | - | ------- | ------- | -
|                                               |                                                                                                             |   | May 31,               
|                                               |                                                                                                             |   | 2002                   |         | 2001
|                                               |                                                                                                             |   |                        |         |     
|                                               |                                                                                                             |   | (Amounts in Thousands)
|ASSETS                                         |                                                                                                             |   |                        |         |      |   |         |        
|Current assets:                                |                                                                                                             |   |                        |         |      |   |         |        
|                                               | Cash and cash equivalents                                                                                   |   | $                      | 5,340   |      |   | $       | 2,891   |  
|                                               | Restricted cash                                                                                             |   |                        |        |      |   |         | 48      |  
|                                               | Accounts receivable, less allowance for doubtful accounts of $8 and
$11                                     |   |                        | 324     |      |   |         | 422     |  
|                                               | Accounts receivable  managed care reinsurance contract                                                     |   |                        | 575     |      |   |         | 783     |  
|                                               | Other receivable                                                                                            |   |                        | 2,548   |      |   |         | 2,548   |  
|                                               | Other current assets                                                                                        |   |                        | 591     |      |   |         | 817     |  
|                                               |                                                                                                             |   |                        |         |      |   |         |        
|Total current assets                           |                                                                                                             |   | 9,378                  |         |      |   | 7,509   |        
|Property and equipment, net                    |                                                                                                             |   | 291                    |         |      |   | 555     |        
|Note receivable                                |                                                                                                             |   | 159                    |         |      |   | 164     |        
|Goodwill, net                                  |                                                                                                             |   | 991                    |         |      |   | 936     |        
|Restricted cash                                |                                                                                                             |   | 430                    |         |      |   | 561     |        
|Other assets                                   |                                                                                                             |   | 150                    |         |      |   | 29      |        
|                                               |                                                                                                             |   |                        |         |      |   |         |        
|Total assets                                   |                                                                                                             | $ | 11,399                 |         |      | $ | 9,754   |        
|                                               |                                                                                                             |   |                        |         |      |   |         |        
|LIABILITIES AND STOCKHOLDERS DEFICIT          |                                                                                                             |   |                        |         |      |   |         |        
|Current liabilities:                           |                                                                                                             |   |                        |         |      |   |         |        
|                                               | Accounts payable and accrued liabilities                                                                    |   | $                      | 2,891   |      |   | $       | 3,302   |  
|                                               | Accrued claims payable                                                                                      |   |                        | 4,635   |      |   |         | 3,071   |  
|                                               | Accrued reinsurance claims payable                                                                          |   |                        | 2,019   |      |   |         | 783     |  
|                                               | Unbenefitted tax refunds received                                                                           |   |                        | 12,092  |      |   |         | 12,092  |  
|                                               | Income taxes payable                                                                                        |   |                        | 16      |      |   |         | 31      |  
|                                               |                                                                                                             |   |                        |         |      |   |         |        
|Total current liabilities                      |                                                                                                             |   | 21,653                 |         |      |   | 19,279  |        
|                                               |                                                                                                             |   |                        |         |      |   |         |        
|Long-term liabilities:                         |                                                                                                             |   |                        |         |      |   |         |        
|                                               | Long-term debt                                                                                              |   |                        | 2,244   |      |   |         | 2,244   |  
|                                               | Other liabilities                                                                                           |   |                        | 21      |      |   |         | 9       |  
|                                               |                                                                                                             |   |                        |         |      |   |         |        
|Total long-term liabilities                    |                                                                                                             |   | 2,265                  |         |      |   | 2,253   |        
|                                               |                                                                                                             |   |                        |         |      |   |         |        
|Total liabilities                              |                                                                                                             |   | 23,918                 |         |      |   | 21,532  |        
|                                               |                                                                                                             |   |                        |         |      |   |         |        
|Commitments and Contingencies (Notes 4 and 14) |                                                                                                             |   |                        |         |      |   |         |        
|Stockholders deficit:                         |                                                                                                             |   |                        |         |      |   |         |        
|                                               | Preferred stock, $50.00 par value; authorized 18,740 shares; none issued                                    |   |                        |        |      |   |         |        |  
|                                               | Common stock, $0.01 par value; authorized 12,500,000 shares; issued
and outstanding 3,878,552 and 3,817,803 |   |                        | 39      |      |   |         | 38      |  
|                                               | Additional paid-in-capital                                                                                  |   |                        | 51,842  |      |   |         | 51,813  |  
|                                               | Deferred compensation                                                                                       |   |                        | (1      | )    |   |         |        |  
|                                               | Accumulated deficit                                                                                         |   |                        | (64,399 | )    |   |         | (63,629 | )
|                                               |                                                                                                             |   |                        |         |      |   |         |        
|Total stockholders deficit                    |                                                                                                             |   | (12,519                | )       |      |   | (11,778 | )      
|                                               |                                                                                                             |   |                        |         |      |   |         |        
|Total liabilities and stockholders deficit    |                                                                                                             | $ | 11,399                 |         |      | $ | 9,754   |        
|                                               |                                                                                                             |   |                        |         |      |   |         |        

See accompanying notes.

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Consolidated Statements of Operations

|                                                                |                                                       |   |                                               |        |      |   |        |        |   |   |        |        |  
|--------------------------------------------------------------- | ----------------------------------------------------- | - | --------------------------------------------- | ------ | ---- | - | ------ | ------ | - | - | ------ | ------ | -
|                                                                |                                                       |   | Year Ended May 31,                           
|                                                                |                                                       |   |                                              
|                                                                |                                                       |   | 2002                                          |        | 2001 |   | 2000  
|                                                                |                                                       |   |                                               |        |      |   |       
|                                                                |                                                       |   | (Amounts in thousands, except per share data)
|                                                                |                                                       |   |                                              
|Operating Revenues                                              |                                                       | $ | 27,625                                        |        |      | $ | 18,192 |        |   | $ | 17,719 |       
|Costs and Expenses:                                             |                                                       |   |                                               |        |      |   |        |        |   |   |        |       
|                                                                | Healthcare operating expenses                         |   |                                               | 24,625 |      |   |        | 15,326 |   |   |        | 15,801 |  
|                                                                | General and administrative expenses                   |   |                                               | 3,544  |      |   |        | 3,842  |   |   |        | 6,974  |  
|                                                                | Recovery of doubtful accounts                         |   |                                               | (112   | )    |   |        | (439   | ) |   |        | (606   | )
|                                                                | Depreciation and amortization                         |   |                                               | 342    |      |   |        | 656    |   |   |        | 794    |  
|                                                                | Restructuring expenses                                |   |                                               |       |      |   |        | (30    | ) |   |        | 831    |  
|                                                                |                                                       |   |                                               |        |      |   |        |        |   |   |        |       
|                                                                |                                                       |   | 28,399                                        |        |      |   | 19,355 |        |   |   | 23,794 |       
|                                                                |                                                       |   |                                               |        |      |   |        |        |   |   |        |       
|Operating loss before items shown below                         |                                                       |   | (774                                          | )      |      |   | (1,163 | )      |   |   | (6,075 | )     
|Other income (expense):                                         |                                                       |   |                                               |        |      |   |        |        |   |   |        |       
|                                                                | Loss in connection with prepayment of note receivable |   |                                               |       |      |   |        | (496   | ) |   |        |       |  
|                                                                | Gain on sale of assets                                |   |                                               |       |      |   |        |       |   |   |        | 9      |  
|                                                                | Loss on sale of assets                                |   |                                               |       |      |   |        |       |   |   |        | (1     | )
|                                                                | Reduction in accrued interest expense                 |   |                                               |       |      |   |        | 290    |   |   |        |       |  
|                                                                | Other non operating income                            |   |                                               | 40     |      |   |        | 332    |   |   |        | 204    |  
|                                                                | Interest income                                       |   |                                               | 88     |      |   |        | 163    |   |   |        | 399    |  
|                                                                | Interest expense                                      |   |                                               | (178   | )    |   |        | (208   | ) |   |        | (289   | )
|                                                                |                                                       |   |                                               |        |      |   |        |        |   |   |        |       
|Loss before items shown below                                   |                                                       |   | (824                                          | )      |      |   | (1,082 | )      |   |   | (5,753 | )     
|Income tax expense                                              |                                                       |   | 1                                             |        |      |   | 35     |        |   |   | 13     |       
|                                                                |                                                       |   |                                               |        |      |   |        |        |   |   |        |       
|Loss before cumulative effect of change in accounting principle |                                                       |   | (825                                          | )      |      |   | (1,117 | )      |   |   | (5,766 | )     
|Cumulative effect of change of accounting principle             |                                                       |   | 55                                            |        |      |   |       |        |   |   |       |       
|                                                                |                                                       |   |                                               |        |      |   |        |        |   |   |        |       
|Net loss                                                        |                                                       | $ | (770                                          | )      |      | $ | (1,117 | )      |   | $ | (5,766 | )     
|                                                                |                                                       |   |                                               |        |      |   |        |        |   |   |        |       
|Basic and diluted loss per share:                               |                                                       |   |                                               |        |      |   |        |        |   |   |        |       
|Loss before cumulative effect of change in accounting principle |                                                       | $ | (0.21                                         | )      |      | $ | (0.29  | )      |   | $ | (1.51  | )     
|Cumulative effect of change in accounting principle             |                                                       |   | 0.01                                          |        |      |   |       |        |   |   |       |       
|                                                                |                                                       |   |                                               |        |      |   |        |        |   |   |        |       
|Net Loss                                                        |                                                       | $ | (0.20                                         | )      |      | $ | (0.29  | )      |   | $ | (1.51  | )     
|                                                                |                                                       |   |                                               |        |      |   |        |        |   |   |        |       
|Weighted Average Common Shares Outstanding (basic and diluted)  |                                                       |   | 3,860                                         |        |      |   | 3,818  |        |   |   | 3,818  |       
|                                                                |                                                       |   |                                               |        |      |   |        |        |   |   |        |       

See accompanying notes

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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS DEFICIT
(IN THOUSANDS)

|                      |                                          |  |                 |   |              |   |         |   |             |  |          |    |               |   |              |   |         |   |            |    |  |   |         |        |   |   |     |     |       |   |         |        |  
|--------------------- | ---------------------------------------- |  | --------------- | - | ------------ | - | ------- | - | ----------- |  | -------- | -- | ------------- | - | ------------ | - | ------- | - | ---------- | -- |  | - | ------- | ------ | - | - | --- | --- | ----- | - | ------- | ------ | -
|                      |                                          |  |                 |   |              |   |         |   |             |  |          |    |               |   |              |   |         |   | ADDITIONAL |    |  |   |         |        |   |   |     |     | TOTAL
|                      |                                          |  | PREFERRED STOCK |   | COMMON STOCK |   | PAID-IN |   | ACCUMULATED |  | DEFERRED |    | STOCKHOLDERS'
|                      |                                          |  | SHARES          |   | AMOUNT       |   | SHARES  |   | AMOUNT      |  | CAPITAL  |    | DEFICIT       |   | COMPENSATION |   | DEFICIT
|                      |                                          |  |                 |   |              |   |         |   |             |  |          |    |               |   |              |   |        
|Balance, May 31, 1999 |                                          |  |                |   |              | $ |        |   |             |  | 3,818    |    |               | $ | 38           |   |         | $ | 51,794     |    |  | $ | (56,746 | )      |   | $ |    |     |       | $ | (4,914  | )     
|                      | Net loss                                 |  |                 |  |              |   |         |  |             |  |          |   |               |   |              |  |         |   |            |   |  |   |         | (5,766 | ) |   |     |    |       |   |         | (5,766 | )
|                      | Compensatory stock options granted       |  |                 |  |              |   |         |  |             |  |          |   |               |   |              |  |         |   |            | 18 |  |   |         |       |   |   |     | (18 | )     |   |         |       |  
|                      | Amortization of deferred compensation    |  |                 |  |              |   |         |  |             |  |          |   |               |   |              |  |         |   |            |   |  |   |         |       |   |   |     | 8   |       |   |         | 8      |  
|                      |                                          |  |                 |   |              |   |         |   |             |  |          |    |               |   |              |   |         |   |            |    |  |   |         |        |   |   |     |     |       |   |         |       
|Balance, May 31, 2000 |                                          |  |                |   |              |   |        |   |             |  | 3,818    |    |               | $ | 38           |   |         | $ | 51,812     |    |  | $ | (62,512 | )      |   | $ | (10 | )   |       | $ | (10,672 | )     
|                      | Net loss                                 |  |                 |  |              |   |         |  |             |  |          |   |               |   |              |  |         |   |            |   |  |   |         | (1,117 | ) |   |     |    |       |   |         | (1,117 | )
|                      | Compensatory stock options granted       |  |                 |  |              |   |         |  |             |  |          |   |               |   |              |  |         |   |            | 1  |  |   |         |       |   |   |     | (1  | )     |   |         |       |  
|                      | Amortization of deferred compensation    |  |                 |  |              |   |         |  |             |  |          |   |               |   |              |  |         |   |            |   |  |   |         |       |   |   |     | 11  |       |   |         | 11     |  
|                      |                                          |  |                 |   |              |   |         |   |             |  |          |    |               |   |              |   |         |   |            |    |  |   |         |        |   |   |     |     |       |   |         |       
|Balance, May 31, 2001 |                                          |  |                |   |              | $ |        |   |             |  | 3,818    |    |               | $ | 38           |   |         | $ | 51,813     |    |  | $ | (63,629 | )      |   | $ |    |     |       | $ | (11,778 | )     
|                      | Net loss                                 |  |                 |  |              |   |         |  |             |  |          |   |               |   |              |  |         |   |            |   |  |   |         | (770   | ) |   |     |    |       |   |         | (770   | )
|                      | Compensatory stock options granted       |  |                 |  |              |   |         |  |             |  |          |   |               |   |              |  |         |   |            | 1  |  |   |         |       |   |   |     | (1  | )     |   |         |       |  
|                      | Shares issued for executive compensation |  |                 |  |              |   |         |  |             |  |          | 50 |               |   |              | 1 |         |   |            | 25 |  |   |         |       |   |   |     |    |       |   |         | 26     |  
|                      | Exercise of stock options                |  |                 |  |              |   |         |  |             |  |          | 11 |               |   |              |  |         |   |            | 3  |  |   |         |       |   |   |     |    |       |   |         | 3      |  
|                      |                                          |  |                 |   |              |   |         |   |             |  |          |    |               |   |              |   |         |   |            |    |  |   |         |        |   |   |     |     |       |   |         |       
|Balance, May 31, 2002 |                                          |  |                |   |              | $ |        |   |             |  | 3,879    |    |               | $ | 39           |   |         | $ | 51,842     |    |  | $ | (64,399 | )      |   | $ | (1  | )   |       | $ | (12,519 | )     
|                      |                                          |  |                 |   |              |   |         |   |             |  |          |    |               |   |              |   |         |   |            |    |  |   |         |        |   |   |     |     |       |   |         |       

See accompanying notes.

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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                      |                                                                      |              |       |                        |     |      |        |         |     |   |        |        |     | 
|------------------------------------------------------------------------------------- | -------------------------------------------------------------------- | ------------ | ----- | ---------------------- | --- | ---- | ------ | ------- | --- | - | ------ | ------ | --- | 
|                                                                                      |                                                                      |              |       | Year Ended May 31,    
|                                                                                      |                                                                      |              |       | 2002                   |     | 2001 |        | 2000   
|                                                                                      |                                                                      |              |       |                        |     |      |        |        
|                                                                                      |                                                                      |              |       | (Amounts in thousands)
|Cash flows from operating activities:                                                 |                                                                      |              |       |                        |     |      |        |         |     |   |        |       
|Net loss                                                                              |                                                                      | $            | (770  | )                      |     | $    | (1,117 | )       |     | $ | (5,766 | )     
|Adjustments to reconcile loss to net cash provided by (used in)
operating activities: |                                                                      |              |       |                        |     |      |        |         |     |   |        |       
|                                                                                      | Depreciation and amortization                                        |              |       | 342                    |     |      |        | 656     |     |   |        | 794    |    
|                                                                                      | Asset write-down                                                     |              |       |                       |     |      |        |        |     |   |        | 10     |    
|                                                                                      | Cumulative effect of change in accounting principle                  |              |       | (55                    | )   |      |        |        |     |   |        |       |    
|                                                                                      | Loss in connection with prepayment of note receivable                |              |       |                       |     |      |        | 496     |     |   |        |       |    
|                                                                                      | Gain on sale of assets                                               |              |       |                       |     |      |        |        |     |   |        | (9     | )  
|                                                                                      | Loss on sale of assets                                               |              |       |                       |     |      |        |        |     |   |        | 1      |    
|                                                                                      | Compensation expense  stock options issued                          |              |       |                       |     |      |        | 11      |     |   |        | 8      |    
|                                                                                      | Restructuring expenses                                               |              |       |                       |     |      |        | (30     | )   |   |        | 89     |    
|                                                                                      | Reduction in accrued interest expense                                |              |       |                       |     |      |        | (290    | )   |   |        |       |    
|Changes in assets and liabilities:                                                    |                                                                      |              |       |                        |     |      |        |         |     |   |        |       
|                                                                                      | Accounts receivable                                                  |              |       | 98                     |     |      |        | (146    | )   |   |        | 656    |    
|                                                                                      | Accounts receivable  managed care reinsurance contract              |              |       | 208                    |     |      |        | (783    | )   |   |        |       |    
|                                                                                      | Accounts receivable  pharmacy and laboratory costs                  |              |       |                       |     |      |        | 10,469  |     |   |        |       |    
|                                                                                      | Other current assets, restricted funds, and other non-current assets |              |       | 284                    |     |      |        | 746     |     |   |        | 896    |    
|                                                                                      | Accounts payable and accrued liabilities                             |              |       | (397                   | )   |      |        | (615    | )   |   |        | (498   | )  
|                                                                                      | Accrued claims payable                                               |              |       | 1,564                  |     |      |        | 261     |     |   |        | (1,355 | )  
|                                                                                      | Accrued reinsurance claims payable                                   |              |       | 1,236                  |     |      |        | 783     |     |   |        |       |    
|                                                                                      | Accrued pharmacy and laboratory costs payable                        |              |       |                       |     |      |        | (10,469 | )   |   |        |       |    
|                                                                                      | Income taxes payable                                                 |              |       | (15                    | )   |      |        | (13     | )   |   |        | (32    | )  
|                                                                                      | Other liabilities                                                    |              |       | (8                     | )   |      |        | (47     | )   |   |        | (107   | )  
|                                                                                      |                                                                      |              |       |                        |     |      |        |         |     |   |        |       
|                                                                                      | Net cash provided by (used in) operating activities                  |              |       | 2,487                  |     |      |        | (88     | )   |   |        | (5,313 | )  
|Cash flows from investing activities:                                                 |                                                                      |              |       |                        |     |      |        |         |     |   |        |       
|                                                                                      | Net proceeds from sale of property and equipment                     |              |       |                       |     |      |        |        |     |   |        | 139    |    
|                                                                                      | Payment received on note for sale of property and equipment          |              |       | 4                      |     |      |        | 509     |     |   |        | 25     |    
|                                                                                      | Additions to property and equipment                                  |              |       | (43                    | )   |      |        | (48     | )   |   |        | (107   | )  
|                                                                                      |                                                                      |              |       |                        |     |      |        |         |     |   |        |       
|                                                                                      | Net cash (used in) provided by investing activities                  |              |       | (39                    | )   |      |        | 461     |     |   |        | 57     |    
|                                                                                      |                                                                      |              |       |                        |     |      |        |         |     |   |        |       
|Cash flows from financing activities:                                                 |                                                                      |              |       |                        |     |      |        |         |     |   |        |       
|                                                                                      | Proceeds from the issuance of Common Stock                           |              |       | 3                      |     |      |        |        |     |   |        |       |    
|                                                                                      | Repayment of debt                                                    |              |       | (2                     | )   |      |        |        |     |   |        | (2     | )  
|                                                                                      |                                                                      |              |       |                        |     |      |        |         |     |   |        |       
|                                                                                      | Net cash provided by (used in) financing activities                  |              |       | 1                      |     |      |        |        |     |   |        | (2     | )  
|                                                                                      |                                                                      |              |       |                        |     |      |        |         |     |   |        |       
|Net increase (decrease) in cash and cash equivalents                                  |                                                                      |              | 2,449 |                        |     |      | 373    |         |     |   | (5,258 | )     
|Cash and cash equivalents at beginning of year                                        |                                                                      |              | 2,891 |                        |     |      | 2,518  |         |     |   | 7,776  |       
|                                                                                      |                                                                      |              |       |                        |     |      |        |         |     |   |        |       
|Cash and cash equivalents at end of year                                              |                                                                      | $            | 5,340 |                        |     | $    | 2,891  |         |     | $ | 2,518  |       
|                                                                                      |                                                                      |              |       |                        |     |      |        |         |     |   |        |       
|Supplemental disclosures of cash flow information:                                    |                                                                      |              |       |                        |     |      |        |         |     |   |        |       
|                                                                                      | Cash paid during the year for                                        |              |       |                        |     |      |        |         |     |   |        |        |    
|                                                                                      |                                                                      | Interest     |       | $                      | 179 |      |        | $       | 177 |   |        | $      | 180 | 
|                                                                                      |                                                                      |              |       |                        |     |      |        |         |     |   |        |       
|                                                                                      |                                                                      | Income taxes |       | $                      | 16  |      |        | $       | 37  |   |        | $      | 48  | 
|                                                                                      |                                                                      |              |       |                        |     |      |        |         |     |   |        |       

See accompanying notes.

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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

NOTE 1  DESCRIPTION OF THE COMPANYS BUSINESS

Comprehensive Care Corporation (the Company) is a Delaware
Corporation organized in 1969. Unless the context otherwise requires, all
references to the Company include Comprehensive Behavioral Care, Inc.
(CompCare or CBC) and subsidiary corporations. The Company, through its
wholly owned subsidiary, CompCare, primarily provides managed care services in
the behavioral health and psychiatric fields, which is its only operating
segment. The Company manages the delivery of a continuum of psychiatric and
substance abuse services to commercial, Medicare, and Medicaid members on behalf
of employers, health plans, government organizations, third-party claims
administrators, and commercial and other group purchasers of behavioral
healthcare services. The managed care operations include administrative service
agreements, fee-for-service agreements, and capitation contracts. The customer
base for its services includes both corporate and governmental entities. The
Companys services are provided primarily by unrelated vendors on a subcontract
or subcapitated basis.

NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CONSOLIDATION

The consolidated financial statements include the accounts of
Comprehensive Care Corporation and its wholly owned subsidiaries. Significant
inter-company accounts and transactions have been eliminated in consolidation.

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from these estimates.

REVENUE RECOGNITION

The Companys managed care
activities are performed under the terms of
agreements with health maintenance organizations (HMOs), preferred provider
organizations (PPOs), and other health plans or payers to provide contracted
behavioral healthcare services to subscribing participants. Revenue
under a substantial portion of these agreements is earned monthly
based on the number of qualified participants regardless of services
actually provided (generally referred to as capitation arrangements).
Such agreements accounted for 84.7% or $23.4 million, of revenue for
the fiscal year ended May 31, 2002, 79.2%, or $14.4 million, of
revenue for the fiscal year ended May 31, 2001, and 81.0%, or
$14.4 million, of revenue for the fiscal year ended May 31, 2000. The balance of the
Companys revenues is earned on a fee-for-service basis and is
recognized as services are rendered.

HEALTHCARE EXPENSE RECOGNITION

The Company attempts to control its costs and risk by entering into
contractual relationships with healthcare providers including hospitals,
physician groups and other managed care organizations either on a sub-capitated,
a discounted fee-for-services, or a per-case basis. The Companys capitation
contracts typically exclude risk for chronic care patients. The cost of
healthcare services is recognized in the period that the Company is obligated to
provide such services. Certain contracted healthcare providers assume the
financial risk for participant care rendered by them and they are compensated on
a sub-capitated basis.

In cases where the Company retains the financial responsibility for
authorizations, hospital utilization, and the cost of other behavioral
healthcare services, the Company establishes an accrual for estimated claims
payable (see Accrued Claims Payable below).

PREMIUM DEFICIENCIES

Estimated future healthcare costs and expenses in excess of estimated
future premiums are recorded as a loss when determinable. No such deficiencies
existed at May 31, 2002 or May 31, 2001.

CASH AND CASH EQUIVALENTS

Cash in excess of daily requirements is invested in short-term
investments with original maturities of three months or less. These investments
aggregated $2.6 million and $1.5 million at May 31, 2002 and 2001, respectively.
These investments are included in cash equivalents in the accompanying
consolidated balance sheets.

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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

RESTRICTED CASH

As of May 31, 2002 and 2001, non-current restricted accounts include
$0.3 million of cash held in trust in connection with the Companys Directors
and Officers liability insurance policy.

PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost. Depreciation of furniture
and equipment is computed using the straight-line method over the estimated
useful lives of 3 to 12 years. Leasehold improvements are amortized over the
term of the related lease.

GOODWILL

Goodwill includes costs in excess of fair value of the net assets
acquired in purchase transactions, less amortization.

In June 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards (SFAS) No. 141, Business
Combinations and No. 142, Goodwill and Other Intangible Assets, which
establishes new standards for the treatment of goodwill and other intangible
assets. SFAS 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. SFAS 142 is effective for
fiscal years beginning after December 31, 2001 and permitted early adoption for
companies with a fiscal year beginning after March 15, 2001. SFAS 142 prescribes
that amortization of goodwill will cease as of the adoption date. The Company
elected to adopt SFAS 142 effective June 1, 2001 and, as a result, there has
been no amortization expense recorded during Fiscal 2002 (see Note 10 -
Goodwill). In accordance with SFAS 142, the Company has performed an
impairment test within six months of the adoption date and has determined that
no impairment of goodwill had occurred as of such date. The Company will perform
an impairment test at least annually thereafter and whenever events and
circumstances occur that might effect the carrying value of goodwill.

ACCRUED CLAIMS PAYABLE

The accrued claims payable liability represents the estimated ultimate
net amounts owed for all behavioral healthcare services provided through the
respective balance sheet dates, including estimated amounts for claims incurred
but not yet reported (IBNR) to the Company. The unpaid claims liability is
estimated using an actuarial paid completion factor methodology and other
statistical analyses. These estimates are subject to the effects of trends in
utilization and other factors. Although considerable variability is inherent in
such estimates, management believes that the unpaid claims liability is
adequate. The estimates are continually reviewed and adjusted as experience
develops or new information becomes known with adjustments included in current
operations.

INCOME TAXES

The Company calculates deferred taxes and related income tax expense
using the liability method. This method determines deferred taxes by applying
the current tax rate to net operating loss carryforwards and to the cumulative
temporary differences between the recorded carrying amounts and the
corresponding tax basis of assets and liabilities. A valuation allowance is
established for deferred tax assets unless their realization is considered more
likely than not. The Companys provision for income taxes is the sum of the
change in the balance of deferred taxes between the beginning and the end of the
period and income taxes currently payable or receivable.

STOCK OPTIONS

The Company has elected to follow Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees (APB 25) and related
interpretations in accounting for its employee stock options. Under APB 25, in
the event that the exercise price of the Companys employee stock options is
less than the market price of the underlying stock on the date of grant,
compensation expense is recognized.

The fair value of options granted to non-employee consultants is being
amortized to expense over the vesting period of the options.

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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

PER SHARE DATA

In calculating basic earnings (loss) per share, net income (loss) is
divided by the weighted average number of common shares outstanding for the
period. Diluted earnings per share reflect the assumed exercise or conversion of
all dilutive securities, such as options and convertible debentures. No such
exercise or conversion is assumed where the effect is antidilutive, such as when
there is a net loss.

FAIR VALUE OF FINANCIAL INSTRUMENTS

FASB Statement No. 107, Disclosures about Fair Value of Financial
Instruments requires disclosure of fair value information about financial
instruments for which it is practical to estimate that value.

For cash and cash equivalents, notes receivable, and restricted cash,
the carrying amount approximates fair value. For long-term debt, the fair value
is based on the estimated market price for the Debentures on the last day of the
fiscal year.

The carrying amounts and fair values of the Companys financial
instruments at May 31, 2002 and 2001, are as follows:

|                          |  |                        |       |       |  |          |       |       |  |   |       |  |  |   |       | 
|------------------------- |  | ---------------------- | ----- | ----- |  | -------- | ----- | ----- |  | - | ----- |  |  | - | ----- | 
|                          |  | 2002                   |       | 2001 
|                          |  | CARRYING               |       | FAIR  |  | CARRYING |       | FAIR 
|                          |  | AMOUNT                 |       | VALUE |  | AMOUNT   |       | VALUE
|                          |  |                        |       |       |  |          |       |      
|                          |  | (AMOUNTS IN THOUSANDS)
|Assets                    |  |                        |       |       |  |          |       |       |  |   |       |  |  |   |       | 
|Cash and cash equivalents |  | $                      | 5,340 |       |  | $        | 5,340 |       |  | $ | 2,891 |  |  | $ | 2,891 | 
|Note receivable           |  |                        | 163   |       |  |          | 163   |       |  |   | 168   |  |  |   | 168   | 
|Restricted cash           |  |                        | 430   |       |  |          | 430   |       |  |   | 609   |  |  |   | 609   | 
|Liabilities               |  |                        |       |       |  |          |       |       |  |   |       |  |  |   |       | 
|Long-term debt            |  | $                      | 2,244 |       |  | $        | 1,534 |       |  | $ | 2,244 |  |  | $ | 1,148 | 

RECLASSIFICATION

Certain prior year amounts have been reclassified to conform with the
current years presentation, including approximately $0.8 million of reinsurance
program reimbursements that were previously classified as both operating revenue
and healthcare operating expense in the Fiscal 2001 consolidated statement of
operations (see Note 4(2)).

NOTE 3  BASIS OF PRESENTATION

The accompanying consolidated financial statements are prepared on a
going concern basis. For the years ended May 31, 2002, 2001 and 2000, the
Company has incurred net losses and, as of May 31, 2002, has a stockholders
deficit of $12.5 million and a working capital deficiency of $12.3 million. The
working capital deficiency results primarily from a $12.1 million liability
related to Federal income tax refunds received in prior years. The ultimate
outcome of the Internal Revenue Service audit whereby it is seeking recovery of
the refunds from the Company, including the amount to be repaid, if any, and the
timing thereof, is not determinable (see Note 14  Income Taxes).

Management cannot state with any degree of certainty whether any
required additional equity or debt financing will be available to it during
Fiscal 2003 and, if available, that the source of financing would be available
on terms and conditions acceptable to the Company.

The above conditions raise substantial doubt about the Companys
ability to continue as a going concern, which is dependent upon its ability to
continue to generate sufficient cash flow to meet its obligations on a timely
basis, successfully resolve the Internal Revenue Service audit, obtain
additional financing as may be required and, ultimately, to attain
profitability. The accompanying consolidated financial statements do not include
any adjustments that may result from the outcome of this uncertainty.

NOTE 4  MAJOR CONTRACTS/CUSTOMERS



|(1) |  | The Company had contracts with Humana Health Plans (Humana) under which
it provided services to members in Florida. Effective June 30, 2000, Humana
completed the sale of its North Florida Medicaid business to another
Florida HMO. Additionally, Humanas contracts with the Company, which
covered specific commercial, Medicaid
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|    |  | and Medicare populations of
approximately 60,000 members in Florida terminated September 30, 2000.
Humana contracts accounted for $0.7 million, or 3.9%, of operating revenue
for the fiscal year ended May 31, 2001 compared to $6.0 million, or 33.8%,
for the fiscal year ended May 31, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | Effective July 1, 2000, the Company entered into a contract with one HMO to
continue to provide behavioral healthcare services to approximately 100,000
of 160,000 Florida members that were managed by the Company under prior
contracts with Humana. The combined revenue from the contracts that were
transitioned from Humana, plus two additional contracts that the Company
has with this HMO, accounted for 17.0%, or $4.7 million, of the Companys
operating revenues during the fiscal year ended May 31, 2002 compared to
17.6%, or $3.2 million, for the fiscal year ended May 31, 2001.
Additionally, the Company has one major contract with an affiliate of this
HMO (see Item 2 below). This HMO has been our customer since November 1998.
The primary contract with this customer has renewed through June 30, 2003
and the contract provides for automatic, additional one-year renewals
unless terminated by either party. Additionally, the Company has one major
contract with an affiliate of this HMO (see Item 2 below).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|(2) |  | During the fourth quarter of the fiscal year ended May 31, 2001, the
Company implemented a new contract to provide behavioral healthcare
services to Connecticut members under contract with one HMO. For the fiscal
year ended May 31, 2002, this contract represented approximately 12.7%, or
$3.5 million, of the Companys operating revenue compared to 3.2%, or $0.6
million for the fiscal year ended May 31, 2001. Additionally, this contract
provides that the Company, through its contract with this HMO, receives
additional funds directly from a state reinsurance program. During the
fiscal year ended May 31, 2002, the Company filed reinsurance claims
totaling approximately $3.8 million. Such claims represent cost
reimbursements and, as such, are not included in the reported operating
revenues and are accounted for as reductions of healthcare operating
expenses. As of May 31, 2002, the Company has reported $0.6 million as a
component of accounts receivable, with $2.0 million reported as accrued
reinsurance claims payable, in the accompanying balance sheet. In the event
that the Company does not collect these reinsurance amounts, the Company
could remain liable for the costs of the specific services provided to
members that qualify for such reimbursements. For non-reinsurance claims
incurred but not reported under this contract, the Company estimates its
claims payable using a similar method as that used for other existing
contracts. As of May 31, 2002, there was a limited amount of historical
data available to the Company for use in such estimates specific to this
contract. Thus, actual results could differ from the claims payable amount
reported as of May 31, 2002. While the Company believes its estimate to be
adequate, management will review and make any necessary changes to its
estimate as additional data becomes available. This HMO has been our
customer since April 2001. The original contract term expires December 31,
2002 and provides for automatic one-year renewals unless terminated by
either party.
|   
|(3) |  | The Company has three contracts with one HMO to provide behavioral
healthcare services to contracted members in Texas. These combined
contracts represented approximately 6.8%, or $1.9 million, 9.7%, or $1.8
million, and $2.1 million, or 11.8%, of the Companys operating revenue for
the fiscal years ended May 31, 2002, 2001 and 2000, respectively. This HMO
has been our customer since February 1998. The primary contract with this
customer has renewed through February 7, 2003 and the contract provides for
additional, automatic one-year renewals unless terminated by either party.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|(4) |  | During the fiscal year ended May 31, 2001, the Company implemented five new
contracts to provide behavioral healthcare services to Florida members
under contracts with one HMO. These combined contracts, plus one additional
contract that was implemented during Fiscal 2002, represented approximately
21.4%, or $5.9 million, and 19.5%, or $3.5 million, of the Companys
operating revenue for the fiscal years ended May 31, 2002 and 2001,
respectively. This HMO has been our customer since July 2000. The primary
contract with this customer has renewed through July 22, 2003 and the
contract provides for additional, automatic one-year renewals unless
terminated by either party.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

The loss of any of the above customers could have a material, adverse effect on
the Companys financial condition and future results of operations.

In general, the Companys contracts with its customers are typically for initial
one-year terms, with automatic annual extensions. Such contracts generally
provide for cancellation by either party with 60 to 90 days written notice.

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NOTE 5  ACCOUNTS RECEIVABLE

Accounts receivable consists of the following:

|                                  |       |   |                        |     |      |   |     |     | 
|--------------------------------- | ----- | - | ---------------------- | --- | ---- | - | --- | --- | 
|                                  |       |   | MAY 31,               
|                                  |       |   | 2002                   |     | 2001
|                                  |       |   |                        |     |     
|                                  |       |   | (Amounts in thousands)
|Managed care capitation contracts |       | $ | 281                    |     |      | $ | 391 |    
|Other trade                       |       |   | 51                     |     |      |   | 42  |    
|                                  |       |   |                        |     |      |   |     |    
|                                  | Total |   | $                      | 332 |      |   | $   | 433 | 
|                                  |       |   |                        |     |      |   |     |    

The following table summarizes changes in the Companys allowance for doubtful
accounts for the years ended May 31, 2002, 2001 and 2000:

|                        |  |                        |     |            |  |             |    |          |  |             |      |         |  |   |      |   |  |   |    | 
|----------------------- |  | ---------------------- | --- | ---------- |  | ----------- | -- | -------- |  | ----------- | ---- | ------- |  | - | ---- | - |  | - | -- | 
|                        |  | BALANCE                |     | ADDITIONS  |  |             |    |          |  | WRITE-OFF   |      |         |  |  
|                        |  | BEGINNING              |     | CHARGED TO |  |             |    |          |  | OF          |      | BALANCE
|                        |  | OF YEAR                |     | EXPENSE    |  | RECOVERIES* |    | ACCOUNTS |  | END OF YEAR
|                        |  |                        |     |            |  |             |    |          |  |            
|                        |  | (Amounts in thousands)
|Year ended May 31, 2002 |  | $                      | 11  |            |  | $           | (3 | )        |  | $           |     |         |  | $ |     |   |  | $ | 8  | 
|Year ended May 31, 2001 |  | $                      | 13  |            |  | $           | 9  |          |  | $           |     |         |  | $ | (11  | ) |  | $ | 11 | 
|Year ended May 31, 2000 |  | $                      | 923 |            |  | $           | 11 |          |  | $           | (268 | )       |  | $ | (653 | ) |  | $ | 13 | 

*Excludes $109,000 in 2002, $448,000 in 2001, and $349,000 in 2000 of recoveries
from accounts previously written off.

Recoveries are reflected on the Companys statement of operations as a
reduction to the provision for doubtful accounts.

NOTE 6  OTHER RECEIVABLE

Other receivable at May 31, 2002 and 2001 represents $2.5 million
advanced to a vendor to prepare a federal income tax refund claim that is more
fully described in Note 14. The costs incurred will be refunded to the Company
should the Internal Revenue Service (IRS) disallow the refund and require its
repayment. To the extent that the IRS allows all or some portion of the refund,
the fees paid will be recognized as expense in proportion to the amount of
refund allowed.

NOTE 7  OTHER CURRENT ASSETS

Other current assets consist of the following:

|                                |                            |   |                        |     |      |   |     |     | 
|------------------------------- | -------------------------- | - | ---------------------- | --- | ---- | - | --- | --- | 
|                                |                            |   | MAY 31,               
|                                |                            |   | 2002                   |     | 2001
|                                |                            |   |                        |     |     
|                                |                            |   | (Amounts in thousands)
|Accounts receivable   other(a) |                            | $ | 191                    |     |      | $ | 473 |    
|Prepaid insurance               |                            |   | 295                    |     |      |   | 207 |    
|Prepaid building rent           |                            |   | 29                     |     |      |   | 69  |    
|Other prepaid fees and expenses |                            |   | 76                     |     |      |   | 68  |    
|                                |                            |   |                        |     |      |   |     |    
|                                | Total other current assets |   | $                      | 591 |      |   | $   | 817 | 
|                                |                            |   |                        |     |      |   |     |    

(a) May 31, 2001 amount includes a $0.3 million bad debt recovery and $0.1
million for an insurance settlement received in June 2001, which are more fully
described in Note 18.

NOTE 8  PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

|                              |  |                        |        |      |  |   |        |  
|----------------------------- |  | ---------------------- | ------ | ---- |  | - | ------ | -
|                              |  | MAY 31,               
|                              |  | 2002                   |        | 2001
|                              |  |                        |        |     
|                              |  | (Amounts in thousands)
|Furniture and equipment       |  | $                      | 3,399  |      |  | $ | 3,359  |  
|Leasehold improvements        |  |                        | 49     |      |  |   | 40     |  
|Capitalized leases            |  |                        | 32     |      |  |   | 3      |  
|                              |  |                        |        |      |  |   |        |  
|                              |  |                        | 3,480  |      |  |   | 3,402  |  
|Less accumulated depreciation |  |                        | (3,189 | )    |  |   | (2,847 | )
|                              |  |                        |        |      |  |   |        |  
|Net property and equipment    |  | $                      | 291    |      |  | $ | 555    |  
|                              |  |                        |        |      |  |   |        |  

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NOTE 9  NOTE RECEIVABLE

Note receivable consists of the following:

|                                                                                                                                                |  |                        |     |      |  |   |     |  
|----------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | --- | ---- |  | - | --- | -
|                                                                                                                                                |  | May 31,               
|                                                                                                                                                |  | 2002                   |     | 2001
|                                                                                                                                                |  |                        |     |     
|                                                                                                                                                |  | (Amounts in Thousands)
|8% promissory note, payable in monthly installments of approximately
$1,400, with a $146,000 principal payment due at maturity on
April 1, 2006 |  | $                      | 163 |      |  | $ | 168 |  
|Less current maturities                                                                                                                         |  |                        | (4  | )    |  |   | (4  | )
|                                                                                                                                                |  |                        |     |      |  |   |     |  
|                                                                                                                                                |  | $                      | 159 |      |  | $ | 164 |  
|                                                                                                                                                |  |                        |     |      |  |   |     |  

On August 31, 2000, the Company entered into a prepayment agreement and
note modification with Jefferson Hills Corporation (JHC) in connection with
the secured promissory note, which originated out of the sale in Fiscal 1999 of
the Companys Aurora, Colorado facility to JHC. The terms of the prepayment
agreement required JHC to immediately remit $500,000 to the Company as a
prepayment on the note. Additionally, the note was modified to reflect a
remaining balance due totaling $170,000 and to require JHC to make monthly
principal and interest payments until April 2006. One final principal payment in
the amount of approximately $146,000 will be due from JHC in April 2006. As an
inducement to JHC to make such prepayment, the Company credited JHC with an
aggregate of approximately $996,000. As a result, the Company recorded a
non-operating loss during the fiscal year ended May 31, 2001 of approximately
$496,000 in connection with this transaction.

NOTE 10  GOODWILL

As a result of the adoption of SFAS 142, effective June 1, 2001, no
amortization expense was recorded during the fiscal year ended May 31, 2002
compared to approximately $72,000 of amortization expense recorded during each
of the fiscal years ended May 31, 2001 and 2000. SFAS 141 requires the
elimination of any unamortized deferred credits related to an excess of fair
value of acquired assets over cost from a business combination for which the
acquisition date was before July 1, 2001 immediately upon adoption of SFAS 142.
As of June 1, 2001, the Company had an unamortized deferred credit of $55,000
that related to an acquisition in 1996. As a result, the Company recognized
$55,000 as the cumulative effect of a change in accounting principle during the
quarter ended August 31, 2001.

Changes in the carrying amount of goodwill for the fiscal years ended May 31,
2002 and 2001 are as follows:

|                                                                 |  |                           |         |      |  |   |           |  
|---------------------------------------------------------------- |  | ------------------------- | ------- | ---- |  | - | --------- | -
|                                                                 |  | Fiscal Year ended May 31,
|                                                                 |  | 2002                      |         | 2001
|                                                                 |  |                           |         |     
|Balance as of the beginning of the fiscal year                   |  | $                         | 936,000 |      |  | $ | 1,008,000 |  
|Amortization                                                     |  |                           |        |      |  |   | (72,000   | )
|Unamortized deferred credit written off and recognized in income |  |                           | 55,000  |      |  |   |          |  
|                                                                 |  |                           |         |      |  |   |           |  
|Balance as of the end of the fiscal year                         |  | $                         | 991,000 |      |  | $ | 936,000   |  
|                                                                 |  |                           |         |      |  |   |           |  

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Prior to the adoption of SFAS 142, the Company amortized goodwill on a
straight-line basis over estimated lives up to 20 years. Had the Company
accounted for goodwill consistent with the provisions of SFAS 142 in prior
years, the Companys net loss would have been affected as follows (in thousands,
except per share amounts):

|                                                                 |  |                   |       |      |  |      |        |   |  |   |        |  
|---------------------------------------------------------------- |  | ----------------- | ----- | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                                                 |  | Fiscal Year Ended
|                                                                 |  | May 31,          
|                                                                 |  | 2002              |       | 2001 |  | 2000
|                                                                 |  |                   |       |      |  |     
|Reported net loss                                                |  | $                 | (770  | )    |  | $    | (1,117 | ) |  | $ | (5,766 | )
|Add back: Goodwill amortization                                  |  |                   |      |      |  |      | 72     |   |  |   | 72     |  
|Elimination: Cumulative effect of change in accounting principle |  |                   | (55   | )    |  |      |       |   |  |   |       |  
|                                                                 |  |                   |       |      |  |      |        |   |  |   |        |  
|Adjusted net loss                                                |  | $                 | (825  | )    |  | $    | (1,045 | ) |  | $ | (5,694 | )
|                                                                 |  |                   |       |      |  |      |        |   |  |   |        |  
|Basic and diluted loss per share:                                |  |                   |       |      |  |      |        |   |  |   |        |  
|Reported net loss                                                |  | $                 | (0.20 | )    |  | $    | (0.29  | ) |  | $ | (1.51  | )
|Goodwill amortization                                            |  |                   |      |      |  |      | 0.02   |   |  |   | 0.02   |  
|Cumulative effect of change in accounting principle              |  |                   | (0.01 | )    |  |      |       |   |  |   |       |  
|                                                                 |  |                   |       |      |  |      |        |   |  |   |        |  
|Adjusted net loss                                                |  | $                 | (0.21 | )    |  | $    | (0.27  | ) |  | $ | (1.49  | )
|                                                                 |  |                   |       |      |  |      |        |   |  |   |        |  
|Weighted Average Common Shares Outstanding  basic and diluted   |  |                   | 3,860 |      |  |      | 3,818  |   |  |   | 3,818  |  
|                                                                 |  |                   |       |      |  |      |        |   |  |   |        |  

NOTE 11  ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities consist of the following:

|                                      |  |                        |       |      |  |   |       | 
|------------------------------------- |  | ---------------------- | ----- | ---- |  | - | ----- | 
|                                      |  | May 31,               
|                                      |  | 2002                   |       | 2001
|                                      |  |                        |       |     
|                                      |  | (Amounts in Thousands)
|Accounts payable                      |  | $                      | 316   |      |  | $ | 549   | 
|Accrued salaries and wages            |  |                        | 170   |      |  |   | 371   | 
|Accrued vacation                      |  |                        | 134   |      |  |   | 125   | 
|Accrued legal and audit               |  |                        | 180   |      |  |   | 221   | 
|Payable to third-party intermediaries |  |                        | 1,025 |      |  |   | 1,050 | 
|Other accrued liabilities             |  |                        | 1,038 |      |  |   | 954   | 
|Deferred compensation                 |  |                        | 28    |      |  |   | 32    | 
|                                      |  |                        |       |      |  |   |       | 
|                                      |  | $                      | 2,891 |      |  | $ | 3,302 | 
|                                      |  |                        |       |      |  |   |       | 

NOTE 12  RESTRUCTURING

During Fiscal 2000, following the termination of two major contracts on
December 31, 1999, the Company underwent a restructuring that included the
closing of the Companys California administrative office, terminating related
executive and staff positions, and centralizing certain contract management and
clinical functions. The Company incurred restructuring charges of $881,000 in
connection therewith, including a separation payment of $760,000 to the
Companys former Chairman and CEO. Rentals under the lease for the California
office were assumed by an entity affiliated with the Companys former Chairman
and CEO. In addition, during Fiscal 1999, the Company incurred restructuring
charges of $600,000 related to the loss of a major contract in Puerto Rico.
Following is an analysis of the restructuring charges together with related
payments reflected in a reserve for restructuring charges:

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FISCAL 2001

|                                     |                                   |   |         |    |         |   |                        |     |           |   |         |     |         |   |   |   | 
|------------------------------------ | --------------------------------- | - | ------- | -- | ------- | - | ---------------------- | --- | --------- | - | ------- | --- | ------- | - | - | - | 
|                                     |                                   |   | Balance |    |         |   |                        |     |           |   |         |     | Balance
|                                     |                                   |   | June 1, |    |         |   |                        |     | Payments/ |   | May 31,
|                                     |                                   |   | 2000    |    | Expense |   | Charges                |     | 2001     
|                                     |                                   |   |         |    |         |   |                        |     |          
|                                     |                                   |   |         |    |         |   | (Amounts in thousands) |     |           |   |        
|Restructuring:                       |                                   |   |         |    |         |   |                        |     |           |   |         |     |         |   |   |  
|                                     | Severance and separation benefits |   | $       |   |         |   | $                      |    |           |   | $       |    |         |   | $ |  | 
|                                     | Write-off of assets               |   |         | 10 |         |   |                        | (10 | )         |   |         |    |         |   |   |  | 
|                                     | Other closing costs               |   |         | 35 |         |   |                        | (20 | )         |   |         | (15 | )       |   |   |  | 
|                                     |                                   |   |         |    |         |   |                        |     |           |   |         |     |         |   |   |   | 
|Totals                               |                                   | $ | 45      |    |         | $ | (30                    | )   |           | $ | (15     | )   |         | $ |  |  
|Puerto Rico and other prior reserves |                                   |   | 59      |    |         |   |                       |     |           |   | (59     | )   |         |   |  |  
|                                     |                                   |   |         |    |         |   |                        |     |           |   |         |     |         |   |   |   | 
|Totals                               |                                   | $ | 104     |    |         | $ | (30                    | )   |           | $ | (74     | )   |         | $ |  |  
|                                     |                                   |   |         |    |         |   |                        |     |           |   |         |     |         |   |   |   | 
|                                     |                                   |   |         |    |         |   |                        |     |           |   |         |     |         |   |   |  

FISCAL 2000

|                                     |                                   |   |         |   |         |   |                        |     |           |   |         |      |         |   |     |    | 
|------------------------------------ | --------------------------------- | - | ------- | - | ------- | - | ---------------------- | --- | --------- | - | ------- | ---- | ------- | - | --- | -- | 
|                                     |                                   |   | Balance |   |         |   |                        |     |           |   |         |      | Balance
|                                     |                                   |   | June 1, |   |         |   |                        |     | Payments/ |   | May 31,
|                                     |                                   |   | 1999    |   | Expense |   | Charges                |     | 2000     
|                                     |                                   |   |         |   |         |   |                        |     |          
|                                     |                                   |   |         |   |         |   | (Amounts in thousands) |     |           |   |        
|Restructuring:                       |                                   |   |         |   |         |   |                        |     |           |   |         |      |         |   |     |   
|                                     | Severance and separation benefits |   | $       |  |         |   | $                      | 721 |           |   | $       | (721 | )       |   | $   |   | 
|                                     | Write-off of assets(1)            |   |         |  |         |   |                        | 116 |           |   |         | (106 | )       |   |     | 10 | 
|                                     | Other closing costs               |   |         |  |         |   |                        | 44  |           |   |         | (9   | )       |   |     | 35 | 
|                                     |                                   |   |         |   |         |   |                        |     |           |   |         |      |         |   |     |    | 
|Totals                               |                                   | $ |        |   |         | $ | 881                    |     |           | $ | (836    | )    |         | $ | 45  |   
|Puerto Rico and other prior reserves |                                   |   | 433     |   |         |   | (50                    | )   |           |   | (324    | )    |         |   | 59  |   
|                                     |                                   |   |         |   |         |   |                        |     |           |   |         |      |         |   |     |    | 
|Totals                               |                                   | $ | 433     |   |         | $ | 831                    |     |           | $ | (1,160  | )    |         | $ | 104 |   
|                                     |                                   |   |         |   |         |   |                        |     |           |   |         |      |         |   |     |    | 



|(1) |  | Includes $90,000 for write-off of leasehold improvements.
|--- |  | ---------------------------------------------------------

NOTE 13  LONG-TERM DEBT

Long-term debt consists of the following:

|                                                                                                                 |  |                        |       |      |  |   |       | 
|---------------------------------------------------------------------------------------------------------------- |  | ---------------------- | ----- | ---- |  | - | ----- | 
|                                                                                                                 |  | May 31,               
|                                                                                                                 |  | 2002                   |       | 2001
|                                                                                                                 |  |                        |       |     
|                                                                                                                 |  | (Amounts in Thousands)
|7 1/2% convertible subordinated debentures due April, 2010, interest
payable semi-annually in April and October* |  | $                      | 2,244 |      |  | $ | 2,244 | 
|                                                                                                                 |  |                        |       |      |  |   |       | 

*The debentures are convertible into approximately 9,000 shares of Common
Stock at a conversion price of $248.12 per share.

NOTE 14  INCOME TAXES

Provision for income taxes consists of the following:

|         |  |                        |   |      |  |      |    |  |  |   |    | 
|-------- |  | ---------------------- | - | ---- |  | ---- | -- |  |  | - | -- | 
|         |  | YEAR ENDED MAY 31,    
|         |  | 2002                   |   | 2001 |  | 2000
|         |  |                        |   |      |  |     
|         |  | (Amounts in thousands)
|Current: |  |                        |   |      |  |      |    |  |  |   |    | 
|Federal  |  | $                      |  |      |  | $    |   |  |  | $ |   | 
|State    |  |                        | 1 |      |  |      | 35 |  |  |   | 13 | 
|         |  |                        |   |      |  |      |    |  |  |   |    | 
|         |  | $                      | 1 |      |  | $    | 35 |  |  | $ | 13 | 
|         |  |                        |   |      |  |      |    |  |  |   |    | 

Reconciliation between the provision for income tax and the amount
computed by applying the statutory Federal income tax rate (34%) to loss before
income tax is as follows:

|                                                          |  |                        |      |      |  |      |      |   |  |   |        |  
|--------------------------------------------------------- |  | ---------------------- | ---- | ---- |  | ---- | ---- | - |  | - | ------ | -
|                                                          |  | YEAR ENDED MAY 31,    
|                                                          |  | 2002                   |      | 2001 |  | 2000
|                                                          |  |                        |      |      |  |     
|                                                          |  | (Amounts in thousands)
|Income tax benefit at the statutory tax rate              |  | $                      | (280 | )    |  | $    | (317 | ) |  | $ | (1,957 | )
|State income tax benefit, net of federal tax effect       |  |                        | (33  | )    |  |      | ( 37 | ) |  |   | (228   | )
|Non-deductible items                                      |  |                        | 58   |      |  |      | 111  |   |  |   | 161    |  
|Benefit of net operating loss carryforward not recognized |  |                        | 255  |      |  |      | 243  |   |  |   | 2,024  |  
|Other, net                                                |  |                        | 1    |      |  |      | 35   |   |  |   | 13     |  
|                                                          |  |                        |      |      |  |      |      |   |  |   |        |  
|                                                          |  | $                      | 1    |      |  | $    | 35   |   |  | $ | 13     |  
|                                                          |  |                        |      |      |  |      |      |   |  |   |        |  

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Significant components of the Companys deferred tax assets and deferred tax liabilities are as follows:

|                          |                                       |                                |   |                        |        |      |   |         |        |  
|------------------------- | ------------------------------------- | ------------------------------ | - | ---------------------- | ------ | ---- | - | ------- | ------ | -
|                          |                                       |                                |   | MAY 31,               
|                          |                                       |                                |   | 2002                   |        | 2001
|                          |                                       |                                |   |                        |        |     
|                          |                                       |                                |   | (Amounts in thousands)
|Deferred Tax Assets:      |                                       |                                |   |                        |        |      |   |        
|                          | Net operating loss carryforwards      |                                | $ | 15,762                 |        |      | $ | 14,910  |       
|                          | Alternative minimum tax credits       |                                |   | 667                    |        |      |   | 667     |       
|                          | Payable to Third Party Intermediaries |                                |   | 361                    |        |      |   | 361     |       
|                          | Employee benefits and options         |                                |   | 88                     |        |      |   | 160     |       
|                          | Other, net                            |                                |   | 283                    |        |      |   | 296     |       
|                          |                                       |                                |   |                        |        |      |   |        
|                          |                                       | Total Deferred Tax Assets      |   |                        | 17,161 |      |   |         | 16,394 |  
|                          | Valuation Allowance                   |                                |   | (16,630                | )      |      |   | (15,863 | )     
|                          |                                       |                                |   |                        |        |      |   |        
|                          | Net Deferred Tax Assets               |                                |   | 531                    |        |      |   | 531     |       
|                          |                                       |                                |   |                        |        |      |   |        
|Deferred Tax Liabilities: |                                       |                                |   |                        |        |      |   |        
|                          | Other receivables                     |                                |   | (531                   | )      |      |   | (531    | )     
|                          |                                       |                                |   |                        |        |      |   |        
|                          |                                       | Total Deferred Tax Liabilities |   |                        | (531   | )    |   |         | (531   | )
|                          |                                       |                                |   |                        |        |      |   |        
|Net Deferred Tax Assets   |                                       | $                              | 0 |                        |        | $    | 0 |        
|                          |                                       |                                |   |                        |        |      |   |        

At May 31, 2002, the Company had Federal net operating loss
carryforwards of approximately $42.0 million resulting from losses incurred in
the fiscal years ended May 31, 1995 through May 31, 2002, which expire in 2010
through 2022. In addition, the Company has a minimum tax credit carryover of
approximately $0.7 million against regular tax in the event that regular tax
expense exceeds the alternative minimum tax expense.

The Company may be unable to utilize some or all of its allowable tax
deductions or losses, which depends upon factors including the availability of
sufficient taxable income from which to deduct such losses during limited
carryover periods. Further, the Companys ability to use any net operating
losses may be subject to limitation in the event that the Company issues or
agrees to issue substantial amounts of additional equity. The Company monitors
the potential for change of ownership and believes that its financing plans as
contemplated will not cause a change of ownership; however, no assurances can
be made that future events will not act to limit the Companys tax benefits.

After consideration of all the evidence, both positive and
negative, especially the requirement that the net operating loss carryforwards
may not be available under the terms of the Offer in Compromise discussed below,
if accepted by the Internal Revenue Service, management has determined that a
valuation allowance at May 31, 2002 and 2001, was necessary to offset the
deferred tax assets based on the likelihood of future realization.

UNBENEFITTED TAX REFUNDS RECEIVED

In connection with the filing of its Federal income tax returns for
fiscal year 1995 and 1996, the Company filed a tentative refund claim to carry
back losses described in Section 172(f) of the Internal Revenue Code (IRC),
requesting a refund of $9.4 million and $5.5 million, respectively, of which
refunds of $9.4 million and $5.4 million were received. In addition, the Company
also filed amended Federal income tax returns for fiscal years prior to 1995,
requesting similar refunds for losses carried back under Section 172(f) of $6.2
million for 1986; $0.4 million for 1985; $0.7 million for 1983; and $0.4 million
for 1982, a total of $7.7 million.

Section 172(f) of the IRC provides for a ten year net operating loss
carryback for specific losses attributable to (1) a product liability or (2) a
liability arising under a federal or state law or out of any tort if the act
giving rise to such liability occurs at least three years before the beginning
of the taxable year. The applicability of Section 172(f) to the type of business
in which the Company operates is unclear. No assurance can be provided that the
Company will be able to retain the refunds received to date or that the other
refunds requested will be received.

During fiscal years 1997 and 1996, the Company recognized a portion of
the refunds received as a tax benefit of $0.3 million and $2.4 million,
respectively. The balance of the refunds received, $12.1 million, is recorded as
a deferred liability, Unbenefitted tax refunds received, pending resolution by
the Internal Revenue Service (IRS) of the appropriateness of the 172(f)
carryback. The other refunds requested under Section 172(f) for prior years of
$7.7 million have not been received, nor has the Company recognized any tax
benefit related to these potential refunds.

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On August 21, 1998, the Company received an examination report, dated
August 6, 1998, from the IRS advising the Company that it was disallowing $12.4
million of the $14.8 million of refunds previously received, and the additional
refunds requested of $7.7 million. If the position of the IRS were to be upheld
the Company would be required to repay $12.4 million in refunds previously
received, plus accrued interest of approximately $8.2 million through May 31,
2002. In this event, the Company would be entitled to a repayment of the fees
advanced to its tax advisor relating to these refunds of approximately $2.5
million, which is reported as other receivable in the accompanying balance
sheets. The Company filed a protest letter with the IRS on November 6, 1998.
This filing commenced the administrative appeals process.

On July 11, 2000, the Company submitted an Offer in Compromise (the
Offer) and, on March 13, 2002, submitted an amended Offer in Compromise
(Amended Offer) to the IRS to resolve the controversy with respect to the
refunds at a substantially reduced amount than the IRS has asserted as indicated
above. To assist the IRS in evaluating the Amended Offer, the Company is
providing additional documents to the IRS and is continuing its discussions with
the IRS. The Amended Offer must be reviewed and approved by the IRS. Pending the
resolution of the Amended Offer, the IRS generally suspends any collection
activities. There can be no assurance that the IRS will accept the Amended
Offer.

If the IRS were to accept the Amended Offer, the IRS would require
that the net operating loss carryforwards are no longer available to the
Company. If the IRS were to disallow the refunds claimed and an offer is not
accepted, the Company will have additional loss carry forwards of approximately
$50 million, which will expire if unused by the year 2010.

NOTE 15  EMPLOYEE BENEFIT PLAN

The Company offers a 401(k) Plan (the Plan), which is a defined
contribution plan qualified under Section 401(k) of the Internal Revenue Code,
for the benefit of its eligible employees. All full-time and part-time employees
who have attained the age of 21 and have completed six consecutive months of
employment are eligible to participate in the Plan. Effective June 1, 1995,
eligibility was modified to six months of employment and a minimum of twenty
(20) regularly scheduled hours per week. Each participant may contribute from 2%
to 15% of his or her compensation to the Plan subject to limitations on the
highly compensated employees to ensure the Plan is non-discriminatory. Company
contributions are discretionary and are determined by the Companys Board of
Directors or the Planning Committee. The Companys employer matching
contributions were $9,000, $10,000, and $17,000 to the Plan in Fiscal 2002,
2001, and 2000 respectively.

NOTE 16  PREFERRED STOCK, COMMON STOCK, AND STOCK OPTION PLANS

Preferred Stock

As of May 31, 2002, there are 18,740 remaining shares authorized and
available to issue, and no outstanding shares of Preferred Stock. The Company is
authorized to issue shares of Preferred Stock, $50.00 par value, in one or more
series, each series to have such designation and number of shares as the Board
of Directors may fix prior to the issuance of any shares of such series. Each
series may have such preferences and relative participation, optional or special
rights with such qualifications, limitations or restrictions stated in the
resolution or resolutions providing for the issuance of such series as may be
adopted from time to time by the Board of Directors prior to the issuance of any
such series.

Common Stock

Authorized shares of common stock reserved for possible issuance for
convertible debentures and stock options are as follows at May 31, 2002:

|                                                  |  |  |           | 
|------------------------------------------------- |  |  | --------- | 
|Convertible debentures                            |  |  | 9,044     | 
|Outstanding stock options                         |  |  | 902,175   | 
|Possible future issuance under stock option plans |  |  | 189,284   | 
|                                                  |  |  |           | 
|Total                                             |  |  | 1,100,503 | 
|                                                  |  |  |           | 

Stock Option Plans

The Company has a 1995 Incentive Plan (the 1995 Plan) which provides
for the granting of stock options, stock appreciation rights, limited stock
appreciation rights, and restricted stock grants to eligible employees and
consultants to the Company. Grants issued under the 1995 Plan may qualify as
Incentive Stock Options (ISOs) under

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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

Section 422A of the Internal Revenue
Code. Options for ISOs may be granted for terms of up to ten years and are
generally exercisable in cumulative increments of either 33% each year or 50%
each six months. Options for Non-statutory Stock Options (NSOs) may be granted
for terms of up to 13 years. The exercise price for ISOs must equal or exceed
the fair market value of the shares on the date of grant, and 65% in the case of
other options. The 1995 Plan also provides for the full vesting of all
outstanding options under certain change of control events. The maximum number
of shares authorized for issuance under the 1995 Plan is 1,000,000. As of May
31, 2002, there were 3,450 options available for grant and there were 902,175
options outstanding, of which 779,925 options were exercisable, under the 1995
Plan.

The Company has a non-qualified stock option plan for its outside
directors (the Directors Plan). Each non-qualified stock option is
exercisable at a price equal to the Common Stocks fair market value as of the
date of grant. Initial grants vest annually in 25% increments beginning on the
first anniversary of the date of grant, provided the individual is still a
director on those dates. Annual grants will become 100% vested as of the first
annual meeting of the Companys stockholders following the date of grant,
provided the individual is still a director as of that date. An optionee who
ceases to be a director shall forfeit that portion of the option attributable to
such vesting dates on or after the date he or she ceases to be a director. The
maximum number of shares authorized for issuance under the Directors Plan is
250,000. As of May 31, 2002, there were 185,834 options available for grant
under the Directors Plan. The Company had no outside directors and there were
no options outstanding to former directors as of May 31, 2002.

A summary of the Companys stock option activity and related information for the
years ended May 31 is as follows:

|                               |  |        |          |                |  |                  |      | 
|------------------------------ |  | ------ | -------- | -------------- |  | ---------------- | ---- | 
|                               |  |        |          |                |  | Weighted Average
|                               |  | Shares |          | Exercise Price
|                               |  |        |          |               
|Outstanding as of May 31, 1999 |  |        | 568,033  |                |  | $                | 5.63 | 
|Cancelled                      |  |        | (222,500 | )(a)           |  |                  | 4.89 | 
|Granted                        |  |        | 896,750  |                |  |                  | 0.48 | 
|Forfeited                      |  |        | (357,608 | )              |  |                  | 4.14 | 
|                               |  |        |          |                |  |                  |      | 
|Outstanding as of May 31, 2000 |  |        | 884,675  |                |  | $                | 1.19 | 
|Granted                        |  |        | 181,000  |                |  |                  | 0.29 | 
|Forfeited                      |  |        | (177,150 | )              |  |                  | 2.05 | 
|                               |  |        |          |                |  |                  |      | 
|Outstanding as of May 31, 2001 |  |        | 888,525  |                |  | $                | 0.84 | 
|Granted                        |  |        | 38,000   |                |  |                  | 0.45 | 
|Exercised                      |  |        | (11,250  | )              |  |                  | 0.27 | 
|Forfeited                      |  |        | (13,100  | )              |  |                  | 0.65 | 
|                               |  |        |          |                |  |                  |      | 
|Outstanding as of May 31, 2002 |  |        | 902,175  |                |  | $                | 0.88 | 
|                               |  |        |          |                |  |                  |      | 



|(a) |  | Includes 120,000 options, exercisable at $6.6875 per share,
held by the former Chief Executive Officer, which were
cancelled in connection with his separation from the Company
in January 2000.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

A summary of options outstanding and exercisable as of May 31, 2002 follows:

|            |         |       |          |                |         |             |           |             |         |             |           |      |                   |  |         |         |           |  |   |      | 
|----------- | ------- | ----- | -------- | -------------- | ------- | ----------- | --------- | ----------- | ------- | ----------- | --------- | ---- | ----------------- |  | ------- | ------- | --------- |  | - | ---- | 
|            |         |       |          |                |         |             |           |             |         |             | Weighted- |      |                   |  |         |         | Weighted-
|            |         |       |          |                |         |             | Weighted- |             | Average |             |           |      |                   |  | Average
|            |         |       | Exercise |                | Average |             | Remaining |             |         |             |           |      | Exercise Price of
|Options     |         | Price |          | Exercise       |         | Contractual |           | Options     |         | Exercisable
|Outstanding |         | Range |          | Price          |         | Life        |           | Exercisable |         | Options    
|            |         |       |          |                |         |             |           |             |         |            
|            | 340,000 |       | $        | 0.25 -  $0.39  |         |             | $         | 0.27        |         |             |           | 8.13 |                   |  |         | 327,750 |           |  | $ | 0.26 | 
|            | 459,250 |       | $        | 0.50 - $0.61   |         |             | $         | 0.56        |         |             |           | 7.49 |                   |  |         | 349,250 |           |  | $ | 0.55 | 
|            | 102,925 |       | $        | 3.5625-  $4.00 |         |             | $         | 3.93        |         |             |           | 6.53 |                   |  |         | 102,925 |           |  | $ | 3.93 | 
|            |         |       |          |                |         |             |           |             |         |             |           |      |                   |  |         |         |           |  |   |      | 
|            | 902,175 |       |          |                |         |             | $         | 0.83        |         |             |           | 7.62 |                   |  |         | 779,925 |           |  | $ | 0.88 | 
|            |         |       |          |                |         |             |           |             |         |             |           |      |                   |  |         |         |           |  |   |      | 

Adjusted pro forma information regarding net income or loss and
earnings or loss per share is required by SFAS 123, Accounting for Stock-based
Compensation, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of SFAS 123. The weighted
average fair values of options granted

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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

were $0.52, $0.14, and $0.41 in Fiscal
2002, 2001, and 2000, respectively. For purposes of pro forma disclosures, the
estimated fair value of the options is amortized to expense over the options
vesting period.

The fair value of these options was estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions:

|                                                                             |  |                    |      |      |  |         |      |           |   |  |      |  
|---------------------------------------------------------------------------- |  | ------------------ | ---- | ---- |  | ------- | ---- | --------- | - |  | ---- | -
|                                                                             |  | YEAR ENDED MAY 31,
|                                                                             |  | 2002               |      | 2001 |  | 2000   
|                                                                             |  |                    |      |      |  |        
|Volatility factor of the expected market price of the
Companys Common Stock |  |                    | 95.0 | %    |  |         | 95.0 | %         |   |  | 65.0 | %
|Expected life (in years) of the options                                      |  |                    | 5    |      |  | 5 and 4 |      | 6, 5, and | 4
|Risk-free interest rate                                                      |  |                    | 4.9  | %    |  |         | 5.8  | %         |   |  | 6.5  | %
|Dividend yield                                                               |  |                    | 0    | %    |  |         | 0    | %         |   |  | 0    | %

The Companys pro forma information is as follows (in thousands except for loss
per share information):

|                                                       |         |   |                    |       |      |   |        |       |   |   |        |       |  
|------------------------------------------------------ | ------- | - | ------------------ | ----- | ---- | - | ------ | ----- | - | - | ------ | ----- | -
|                                                       |         |   | YEAR ENDED MAY 31,
|                                                       |         |   | 2002               |       | 2001 |   | 2000  
|                                                       |         |   |                    |       |      |   |       
|Pro forma net loss attributable to common stockholders |         | $ | (785               | )     |      | $ | (1,132 | )     |   | $ | (6,461 | )    
|Pro forma net loss per common share:                   |         |   |                    |       |      |   |        |       |   |   |        |      
|                                                       | Basic   |   | $                  | (0.20 | )    |   | $      | (0.30 | ) |   | $      | (1.69 | )
|                                                       | Diluted |   | $                  | (0.20 | )    |   | $      | (0.30 | ) |   | $      | (1.69 | )

NOTE 17  COMMITMENTS AND CONTINGENCIES

Lease Commitments

The Company leases certain facilities and equipment. The facility
leases contain escalation clauses based on the Consumer Price Index and
provisions for payment of real estate taxes, insurance, and maintenance and
repair expenses. Total rental expense for all operating leases was $0.6 million,
$0.7 million, and $0.8 million for fiscal years 2002, 2001, and 2000,
respectively. During Fiscal 2000, the Company received rental income of $84,000
in connection with the sublease of a portion of its California facilities (which
were closed in Fiscal 2000) to entities operated by the Companys former Chief
Executive Officer (CEO). The Company has no future obligation under the
California lease, having completed a transfer of this lease in Fiscal 2000 to an
entity managed by the Companys former CEO.

On February 2, 2001, the Company entered into a lease agreement for
premises to serve as the principal business and executive offices for the
Company and CBC, its principal operating subsidiary. CBC is the principal lessee
under the lease, and the Company is the guarantor of the lease. The lease, which
began on March 22, 2001, is for a term of 5 years and 2 months and provides for
a base rent of approximately $22,000 per month for the first 12 months of the
lease term, with intervening escalations during each successive 12-month period
under the lease term, with a final monthly rental of approximately $25,000. In
connection with this lease, the Company posted a lease security deposit in
February 2001, in the amount of $65,000.

Future minimum payments, by year and in the aggregate, under
non-cancelable operating leases with initial or remaining terms of one year or
more, consist of the following at May 31, 2002:

|                             |  |                        |       | 
|---------------------------- |  | ---------------------- | ----- | 
|Fiscal Year                  |  | Operating Leases      
|                             |  |                       
|                             |  | (Amounts in thousands)
|2003                         |  | $                      | 554   | 
|2004                         |  |                        | 451   | 
|2005                         |  |                        | 341   | 
|2006                         |  |                        | 346   | 
|2007                         |  |                        | 45    | 
|                             |  |                        |       | 
|Total minimum lease payments |  | $                      | 1,737 | 
|                             |  |                        |       | 

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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

Other Commitments and Contingencies



|(1) |  | During the fiscal year ended May 31, 2001, the Company implemented a
major contract for one new client requiring that the Company maintains
a $600,000 performance bond throughout the term of the contract. This
bond, which was issued in September 2001 with an effective date of
April 1, 2001, is unsecured and is automatically renewable as long as
the contract remains in force.                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | During the fiscal year ended May 31, 2000, the Company renewed one
contract, which included a requirement that the Company maintains a
$550,000 performance bond throughout the term of the contract. The
original term of the bond was for one year and the bond, which is
unsecured, is automatically renewable as long as the contract remains
in force.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   
|(3) |  | On February 19, 1999, the California Superior Court denied the
Companys Petition for Writ of Mandate of an adverse administrative
appeal decision regarding application of the Maximum Inpatient
Reimbursement Limitation to Medi-Cal reimbursement paid to Brea
Neuropsychiatric Hospital for its fiscal periods 1983 through 1986. The
Company owned this facility until its disposal in fiscal year 1991. The
subject matter of the Superior Court action involved the refusal of the
administrative law judge to order further reductions in the liability
for costs associated with treating high cost, long stay Medi-Cal
patients, which are commonly referred to as outliers.                                                                                                                                                                         
|   
|    |  | During the fiscal year ended May 31, 2001, the Company lowered its
estimate by approximately $0.3 million specific to interest charges
that were previously accrued in connection with this liability. This
change in estimate was based on information provided to the Company by
the California Department of Health Services (the Department). As of
May 31, 2002, the Company has approximately $1.0 million accrued
relating to this matter.                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|    |  | Effective July 2002, the Company has entered into a Repayment Agreement
with the Department to resolve this liability at a substantially
reduced amount. The terms of the Repayment Agreement will require the
Company to either 1) pay one lump sum of $450,000 to the Department on
or before September 1, 2002 or 2) beginning September 1, 2002, the
Company will be required to make three monthly installment payments of
$160,000 each, with the last payment being due on or before November 1,
2002, for a total of $480,000 as full and complete satisfaction of the
outstanding liability. If neither of the arrangements discussed under
1) or 2) above is satisfied, the Company will be considered to be in
default and the Department has the right to collect the full amount of
the claim plus interest, attorneys fees, and collections costs.
|   
|(4) |  | With respect to the contingency related to prior years income taxes, see Note 14, Income Taxes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   
|(5) |  | During the year ended May 31, 2001, the Company reached an agreement
with Humana to resolve all outstanding disputed matters with Humana
Health Plans of Puerto Rico, Inc. related to the Companys contract
with Humana, which expired on March 31, 1999. Such settlement did not
require any payment by either party. As a result of the resolution, the
Company has removed the $10.5 million receivable and related accrued
claims payable from its balance sheet. These amounts were specific to
the pharmacy and laboratory costs that were the financial
responsibility of the Company, but were administered by Humana. Because
of the uncertainty surrounding the determination of the actual pharmacy
and laboratory costs incurred, the Company had previously reported a
100% loss ratio for the contract.                                           
|   
|(6) |  | The Company would remain liable to perform the services covered under subcapitation agreements if the parties with which the Company subcapitates were unable to
fulfill their responsibilities under such agreements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

From time to time, the Company and its subsidiaries are also parties
and their property is subject to ordinary, routine litigation incidental to
their business. In some pending cases, claims may exceed insurance policy limits
and the

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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

Company or any one of its subsidiaries may have exposure to a liability
that is not covered by insurance. Management believes that the outcome of such
lawsuits will not have a material adverse impact on the Companys financial
statements.

NOTE 18  QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

FISCAL 2002

|                                                                         |  |                                               |       |             |  |         |       |         |  |       |       |   |  |   |       |   |  |   |        |  
|------------------------------------------------------------------------ |  | --------------------------------------------- | ----- | ----------- |  | ------- | ----- | ------- |  | ----- | ----- | - |  | - | ----- | - |  | - | ------ | -
|                                                                         |  | Quarter Ended                                 |       | Fiscal Year
|                                                                         |  | 8/31/01                                       |       | 11/30/01    |  | 2/28/02 |       | 5/31/02 |  | Total
|                                                                         |  |                                               |       |             |  |         |       |         |  |      
|                                                                         |  | (Amounts in thousands, except per share data)
|Operating revenues                                                       |  | $                                             | 6,126 |             |  | $       | 6,470 |         |  | $     | 7,110 |   |  | $ | 7,919 |   |  | $ | 27,625 |  
|                                                                         |  |                                               |       |             |  |         |       |         |  |       |       |   |  |   |       |   |  |   |        |  
|Gross profit                                                             |  |                                               | 916   |             |  |         | 946   |         |  |       | 1,017 |   |  |   | 121   |   |  |   | 3,000  |  
|                                                                         |  |                                               |       |             |  |         |       |         |  |       |       |   |  |   |       |   |  |   |        |  
|General and administrative expenses                                      |  |                                               | 826   |             |  |         | 873   |         |  |       | 874   |   |  |   | 971   |   |  |   | 3,544  |  
|Recovery of doubtful accounts                                            |  |                                               | (14   | )           |  |         | (71   | )       |  |       | (3    | ) |  |   | ( 24  | ) |  |   | (112   | )
|Depreciation and amortization                                            |  |                                               | 101   |             |  |         | 87    |         |  |       | 80    |   |  |   | 74    |   |  |   | 342    |  
|Other expense (income)                                                   |  |                                               | 4     |             |  |         | 24    |         |  |       | 20    |   |  |   | 3     |   |  |   | 51     |  
|                                                                         |  |                                               |       |             |  |         |       |         |  |       |       |   |  |   |       |   |  |   |        |  
|Income (loss) before cumulative effect of change in
accounting principle |  |                                               | (1    | )           |  |         | 33    |         |  |       | 46    |   |  |   | (903  | ) |  |   | (825   | )
|Cumulative effect of change in accounting principle                      |  |                                               | 55    |             |  |         |      |         |  |       |      |   |  |   |      |   |  |   | 55     |  
|                                                                         |  |                                               |       |             |  |         |       |         |  |       |       |   |  |   |       |   |  |   |        |  
|Net income (loss)                                                        |  | $                                             | 54    | (a)         |  | $       | 33    | (b)     |  | $     | 46    |   |  | $ | (903  | ) |  | $ | (770   | )
|                                                                         |  |                                               |       |             |  |         |       |         |  |       |       |   |  |   |       |   |  |   |        |  
|Basic and diluted earnings (loss) per share:                             |  |                                               |       |             |  |         |       |         |  |       |       |   |  |   |       |   |  |   |        |  
|Income (loss) before cumulative effect of change in
accounting principle |  | $                                             |      |             |  | $       | 0.01  |         |  | $     | 0.01  |   |  | $ | (0.23 | ) |  | $ | (0.21  | )
|Cumulative effect of change in accounting principle                      |  |                                               | 0.01  |             |  |         |      |         |  |       |      |   |  |   |      |   |  |   | 0.01   |  
|                                                                         |  |                                               |       |             |  |         |       |         |  |       |       |   |  |   |       |   |  |   |        |  
|Net income (loss)                                                        |  | $                                             | 0.01  | (a)         |  | $       | 0.01  | (b)     |  | $     | 0.01  |   |  | $ | (0.23 | ) |  | $ | (0.20  | )
|                                                                         |  |                                               |       |             |  |         |       |         |  |       |       |   |  |   |       |   |  |   |        |  
|Weighted Average Common Shares Outstanding  basic                       |  |                                               | 3,834 |             |  |         | 3,867 |         |  |       | 3,867 |   |  |   | 3,871 |   |  |   | 3,860  |  
|                                                                         |  |                                               |       |             |  |         |       |         |  |       |       |   |  |   |       |   |  |   |        |  
|Weighted Average Common Shares Outstanding  diluted                     |  |                                               | 3,989 |             |  |         | 3,988 |         |  |       | 4,187 |   |  |   | 3,871 |   |  |   | 3,860  |  
|                                                                         |  |                                               |       |             |  |         |       |         |  |       |       |   |  |   |       |   |  |   |        |  



|(a) |  | Includes a $55,000 cumulative effect of change in accounting principle (see Note 10  Goodwill).
|--- |  | --------------------------------------------------------------------------------------------------
|(b) |  | Includes a $66,000 bad debt recovery specific to one contract that terminated in 1999.            

FISCAL 2001

|                                                               |  |                                               |        |             |  |         |       |         |  |       |       |     |  |   |       |      |  |   |        |    
|-------------------------------------------------------------- |  | --------------------------------------------- | ------ | ----------- |  | ------- | ----- | ------- |  | ----- | ----- | --- |  | - | ----- | ---- |  | - | ------ | ---
|                                                               |  | Quarter Ended                                 |        | Fiscal Year
|                                                               |  | 8/31/00                                       |        | 11/30/00    |  | 2/28/01 |       | 5/31/01 |  | Total
|                                                               |  |                                               |        |             |  |         |       |         |  |      
|                                                               |  | (Amounts in thousands, except per share data)
|Operating revenues                                             |  | $                                             | 3,739  |             |  | $       | 4,441 |         |  | $     | 4,560 |     |  | $ | 5,452 | (e)  |  | $ | 18,192 | (e)
|                                                               |  |                                               |        |             |  |         |       |         |  |       |       |     |  |   |       |      |  |   |        |    
|Gross profit                                                   |  |                                               | 522    |             |  |         | 833   |         |  |       | 907   |     |  |   | 604   |      |  |   | 2,866  |    
|                                                               |  |                                               |        |             |  |         |       |         |  |       |       |     |  |   |       |      |  |   |        |    
|General and administrative expenses                            |  |                                               | 952    |             |  |         | 929   |         |  |       | 930   |     |  |   | 1,031 |      |  |   | 3,842  |    
|Recovery of doubtful accounts                                  |  |                                               | (15    | )           |  |         | (26   | )       |  |       | (41   | )   |  |   | (357  | )    |  |   | (439   | )  
|Depreciation and amortization                                  |  |                                               | 172    |             |  |         | 169   |         |  |       | 168   |     |  |   | 147   |      |  |   | 656    |    
|Other expense (income)                                         |  |                                               | 523    |             |  |         | (268  | )       |  |       | (215  | )   |  |   | (116  | )    |  |   | (76    | )  
|                                                               |  |                                               |        |             |  |         |       |         |  |       |       |     |  |   |       |      |  |   |        |    
|Net
income (loss)                                              |  | $                                             | (1,110 | )(a)        |  | $       | 29    | (b)     |  | $     | 65    | (c) |  | $ | (101  | )(d) |  | $ | (1,117 | )  
|                                                               |  |                                               |        |             |  |         |       |         |  |       |       |     |  |   |       |      |  |   |        |    
|Basic and diluted earnings (loss) per share                    |  | $                                             | (0.29  | )(a)        |  | $       | 0.01  | (b)     |  | $     | 0.02  | (c) |  | $ | (0.03 | )(d) |  | $ | (0.29  | )  
|                                                               |  |                                               |        |             |  |         |       |         |  |       |       |     |  |   |       |      |  |   |        |    
|Weighted Average Common Shares Outstanding  basic and
diluted |  |                                               | 3,818  |             |  |         | 3,818 |         |  |       | 3,818 |     |  |   | 3,818 |      |  |   | 3,818  |    
|                                                               |  |                                               |        |             |  |         |       |         |  |       |       |     |  |   |       |      |  |   |        |    

(a)  Includes a $0.5 million non-operating loss related to the note receivable
prepayment arrangement.
(b) Includes a $0.3 million reduction in interest expense in connection with a
change in estimate specific to one third party liability and $0.2 million of
income in connection with one legal settlement. 
(c) Includes $0.2 million of
income in connection with one legal settlement.
(d) Includes a $0.3 million bad debt recovery specific to one contract that
terminated in 1999 and $0.1 million of non-operating income specific to proceeds
received from one insurance settlement in which the Company was a claimant. 
(e)
Certain prior year amounts have been reclassified to conform with the current
years presentation, including approximately $0.8 million of reinsurance program
reimbursements that were previously classified equally as operating revenue and
healthcare operating expense in Fiscal 2001 (see Note 4  Major
Contracts/Customers, Item 2, for a description of the specific contract that
includes state reinsurance funds).

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PART III

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS

None.

ITEMS 10 and 11. DIRECTORS AND EXECUTIVE COMPENSATION

The Company expects to file its definitive proxy statement with the
Securities and Exchange Commission no later than 120 days after the end of the
fiscal year. The information set forth therein under Election of Directors and
Executive Compensation is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information required is set forth under the caption Principal
Stockholders in the proxy statement for the 2002 annual meeting of stockholders
and is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information required is set forth under the caption Election of
Directors in the proxy statement for the 2002 annual meeting of stockholders
and is incorporated herein by reference.




PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

|       |  |                                                                                          
|------ |  | -----------------------------------------------------------------------------------------
|(a) 1. |  | Financial Statements  Included in Part II of this report:                               
|       |  | Report of Independent Certified Public Accountants                                       
|       |  | Consolidated Balance Sheets, May 31, 2002 and 2001                                       
|       |  | Consolidated Statements of Operations, Years Ended May 31, 2002,
2001 and 2000           
|       |  | Consolidated Statements of Stockholders Deficit,
Years Ended May 31, 2002, 2001 and 2000
|       |  | Consolidated Statements of
Cash Flows, Years Ended May 31, 2002, 2001 and 2000           
|       |  | Notes to Consolidated Financial Statements                                               
|       |  |                                                                                          
|2.     |  | Financial Statement Schedules:                                                           
|       |  |                                                                                          
|       |  | None.                                                                                    

Other schedules are omitted, as required information is inapplicable or
the information is presented in the consolidated financial statements or related
notes.



| | 3. |  | Exhibits:
| | -- |  | ---------

|       |  |                                                                                                                                    
|------ |  | -----------------------------------------------------------------------------------------------------------------------------------
|Number |  | Description and Reference                                                                                                          
|       |  |                                                                                                                                    
|3.1    |  | Restated Certificate of Incorporation as amended. (5)                                                                              
|3.2    |  | Restated Bylaws as amended July 20, 2000. (12)                                                                                     
|4.1    |  | Indenture dated April 25, 1985 between the Company and Bank of America, NT&SA, relating to Convertible Subordinated Debentures. (1)
|4.2    |  | Form of Common Stock Certificate. (7)                                                                                              
|10.1   |  | Form of Stock Option Agreement. *(2)                                                                                               
|10.2   |  | Form of Indemnity Agreement as amended March 24, 1994. *(3)                                                                        
|10.3   |  | 1988 Incentive Stock Option and 1988 Non-statutory Stock Option Plans, as amended. *(4)                                            
|10.4   |  | Directors and Officers Trust dated February 27, 1995 between the Company and Mark Twain Bank. *(5)                                 
|10.5   |  | Comprehensive Care Corporation 1995 Incentive Plan, as amended on November 17, 1998. (13)                                          

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|       |  |                                                                                                                                                                           
|------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |  | Description and Reference                                                                                                                                                 
|       |  |                                                                                                                                                                           
|10.6   |  | Amended and Restated Non-Employee Directors Stock Option Plan. *(6)                                                                                                      
|10.7   |  | Employment agreement dated September 14, 1998 between the Company and Robert J. Landis. *(10)                                                                             
|10.8   |  | Addendum to employment agreement between the Company and Robert J. Landis. (11)                                                                                           
|10.9   |  | Employment agreement dated July 2, 1999 between the Company and Mary Jane Johnson. *(8)                                                                                   
|10.10  |  | Employment agreement dated June 3, 2002 between the Company and Paul R. McCarthy. *(14)                                                                                   
|10.11  |  | Employment agreement dated June 3, 2002 between the Company and Thomas C. Clay. *(14)                                                                                     
|21     |  | List of the Companys active subsidiaries (filed herewith)                                                                                                                
|23     |  | Consent of Eisner, LLP (filed herewith)                                                                                                                                   
|99.1   |  | Comprehensive Care Corporation CEO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed
herewith)
|99.2   |  | Comprehensive Care Corporation CEO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed
herewith)



---

|* |  | Management contract or compensatory plan or arrangement with one or more
directors or executive officers.
|- |  | ---------------------------------------------------------------------------------------------------------

(1) Filed as an exhibit to the Companys Form S-3 Registration Statement No. 2-97160.
(2) Filed as an exhibit to the Companys Form 10-K for the fiscal year ended May 31, 1988.
(3) Filed as an exhibit to the Companys Form 10-K for the fiscal year ended May 31, 1994.
(4) Filed as an exhibit to the Companys Form 10-Q for the quarter ended November 30, 1994.
(5) Filed as an exhibit to the Companys Form 10-Q for the quarter ended February 28, 1995.
(6) Filed as an exhibit to the Companys Form 10-K for the fiscal year ended May 31, 1995.
(7) Filed as an exhibit to the Companys Form 8-K dated January 30, 1997.
(8) Filed as an exhibit to the Companys Form 8-K dated July 2, 1999.
(9) Filed with original of Registration Statement on Form S-1, dated January 29, 1997.
(10) Filed as an exhibit to the Companys Form 8-K dated September 24, 1998.
(11) Filed as an exhibit to the Companys Form 8-K dated November 25, 1998.
(12) Filed as an exhibit to the Companys Form 10-K for the Fiscal Year ended May 31, 2000.
(13) Filed as an exhibit to the Companys Form 8-K dated November 25, 1998.
(14) Filed as an exhibit to the Companys Form 8-K dated June 7, 2002.

(b) Reports on Form 8-K.



| | 1) |  | The Company filed a current report on Form 8-K, dated
June 7, 2002, to report under Item 5 that the Board of
Directors had elected Howard A. Savin, Ph.D., effective
June 3, 2002, to fill one existing vacancy for a Class II
Director.                                                                                                                                                                                                               
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |    |  | Additionally, the Company announced that it had hired Paul R. McCarthy, Ph.D. to fill the position of Chief Operating Officer for Comprehensive
Behavioral Care, Inc. (CBC). The Company also announced the promotion of Thomas C. Clay, MSW to the position of President, Public Sector
Services for CBC. Further, the Company reported that it had entered into employment agreements, each effective June 3, 2002, with Dr. McCarthy
and Mr. Clay.

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SIGNATURES

Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, August 23, 2002.

|   |  |                                                                                                    
|-- |  | ---------------------------------------------------------------------------------------------------
|   |  | COMPREHENSIVE CARE CORPORATION                                                                     
|   |  |                                                                                                    
|   |  |                                                                                                    
|By |  | /s/
       MARY JANE JOHNSON                                                                       
|   |  |                                                                                                    
|   |  | Mary Jane Johnson
President and Chief Executive Officer
(Principal Executive Officer)              
|   |  |                                                                                                    
|   |  |                                                                                                    
|By |  | /s/        
 ROBERT J. LANDIS                                                                      
|   |  |                                                                                                    
|   |  | Robert J. Landis
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates so indicated.

|                                         |  |                                                                                                                         |  |                
|---------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------- |  | ---------------
|SIGNATURE                                |  | TITLE                                                                                                                   |  | DATE           
|                                         |  |                                                                                                                         |  |                
|                                        
|/s/   MARY JANE JOHNSONMary Jane Johnson |  | President, Chief Executive Officer,
and Director                                                                        |  | August 23, 2002
|                                        
|/s/   ROBERT J. LANDISRobert J. Landis   |  | Chairman of the Board of Directors,
Chief Financial Officer, and Treasurer
(Principal Financial and
Accounting Officer) |  | August 23, 2002
|                                        
|/s/   HOWARD A. SAVINHoward A. Savin     |  | Director                                                                                                                |  | August 23, 2002

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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES




Exhibit Index

Fiscal Year Ended May 31, 2002

|        |  |                                                                                                                                                           |  |             |    | 
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | -- | 
|EXHIBIT |  |                                                                                                                                                           |  |             |    | 
|NUMBER  |  | DESCRIPTION                                                                                                                                               |  | PAGE NUMBER
|        |  |                                                                                                                                                           |  |            
|21      |  | List of the Companys subsidiaries                                                                                                                        |  |             | 41 | 
|23      |  | Consent of Eisner, LLP                                                                                                                                    |  |             | 42 | 
|99.1    |  | Comprehensive Care Corporation CEO Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |  |             | 43 | 
|99.2    |  | Comprehensive Care Corporation CFO Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |  |             | 44 | 

40